The Resolution Foundation presents the key findings from its pre-Budget report – which highlights some of the challenges and trade-offs facing the Chancellor

1. Light at the end of the tunnel?
Will it be an ‘end of austerity’ Budget?
Nick Macpherson, former Permanent Secretary at theTreasury
Anneliese Dodds, ShadowTreasury Minister
Matt Whittaker, Deputy Director of the Resolution Foundation
Torsten Bell, Director of the Resolution Foundation
24 October 2018
This event will commence shortly
@resfoundation #Budget2018

2. Light at the end of the tunnel?
Will it be an ‘end of austerity’ Budget?
2
Nick Macpherson, former Permanent Secretary at theTreasury
Anneliese Dodds, ShadowTreasury Minister
Matt Whittaker, Deputy Director of the Resolution Foundation
Torsten Bell, Director of the Resolution Foundation
October 2018
@resfoundation #Budget2018
Wifi: 2QAG_guest password: Welcome_Guests

3. TUNNELVISION
Autumn Budget 2018 and ‘ending austerity’
Matt Whittaker
October 2018
@MattWhittakerRF @resfoundation
3

4. Heading into the Budget, the Chancellor has been tasked with delivering
on the Prime Minister’s promise to ‘end austerity’
4
Theresa May, Conservative conference speech, 3 October 2018
Sound finances are essential, but they are not the limit of our ambition…
when we’ve secured a good Brexit deal for Britain, at the Spending Review
next year we will set out our approach for the future. Debt as a share of the
economy will continue to go down, support for public services will go up.
Because, a decade after the financial crash, people need to know that the
austerity it led to is over and that their hard work has paid off.

5. Begging the question ‘how much will it cost’?
Answer: £31.4bn
5
• Ending day-to-day departmental spending cuts (RDEL per capita)
£26.3bn by 2022-23
• Cancelling the final year of the benefit freeze (due to start April 2019)
Costs £1.5bn initially, rising to £1.7bn in 2022-23
• Restoring the value of work allowances in Universal Credit
Expected to cost £3.4bn in 2022-23 (though ongoing UC delays could change this)

6. Begging the question ‘how much will it cost’?
Answer: £31.4bn
Answer: £31.4bn
6
• Ending day-to-day departmental spending cuts (RDEL per capita)
£26.3bn by 2022-23
• Cancelling the final year of the benefit freeze (due to start April 2019)
Costs £1.5bn initially, rising to £1.7bn in 2022-23
• Restoring the value of work allowances in Universal Credit
Expected to cost £3.4bn in 2022-23 (though ongoing UC delays could change this)

7. The good news for the Chancellor is that he is expected to receive a
very sizeable upgrade from the OBR
7
At the Spring Statement, the OBR
that the full year borrowing figure
for 2017-18 would total £45.2bn
Its 2018-19 projection came in
£8.1bn lower at £37.1bn
Source: OBR & ONS

8. The good news for the Chancellor is that he is expected to receive a
very sizeable upgrade from the OBR
8
Latest ONS figures put
borrowing in 2017-18 at
£39.8bn, some £5.4bn lower
than the OBR’s projection in
March
Source: OBR & ONS

9. The good news for the Chancellor is that he is expected to receive a
very sizeable upgrade from the OBR
9
Year-to-date borrowing is 35%
down on the same period in 2017-
18 figures, with the difference
stemming from stronger-than-
expected tax receipt growth and
lower central government spending
A straight extrapolation would
bring full-year borrowing in £11bn
lower than projected in March
Source: OBR & ONS

10. The good news for the Chancellor is that he is expected to receive a
very sizeable upgrade from the OBR
10
But the OBR has hinted that an
extrapolation is too conservative
an approach to updating the
2018-19 projection, pointing out
that the in-year figures are
understating onshore
corporation tax receipts
As the FinancialTimes has
reported, correcting for this
understatement implies that
borrowing might end the year at
£24bn, some £13bn (or 40%)
lower than the OBR’s previous
projection
Source: OBR & ONS

11. If the 2018-19 improvement carries over into subsequent years, the
Chancellor will enjoy a big headroom increase against his fiscal mandate
11Source: OBR
The trajectory for
borrowing set out by the
OBR in March implied that
the Chancellor would have
headroom of £15.4 billion
in 2020-21 relative to his
fiscal mandate (to have
the structural budget
below 2% of GDP by
2020-21)

12. Lifting the space he is projected to have in 2020-21 from £15bn to £28bn,
and providing enough funds to cover new NHS spending in 2019-20
12Note: The uptick in the revised structural borrowing line in 2019-20 is caused by the fact that the first year of the five-year NHS
plan directly increases RDEL, with no offsetting revenue increase as yet announced. Source: OBR, ONS and RF calculations
Applying the £13.1bn borrowing
upgrade in 2018-19 and assuming
that this improvement persists
into subsequent years, raises the
2020-21 headroom to £28.5bn (or
1.3% of GDP)
This also means that the
Chancellor could meet the £7.4bn
increase in NHS funding scheduled
for 2019-20 while still borrowing
less than he was projected to back
in March

13. But is it enough to meet the £31bn ‘end-of-austerity’ price tag?
13
The fiscal mandate specifies
getting the structural deficit
below 2% of GDP “by 2020-
21”, implying that it must
remain below this level in all
subsequent years. Relative
to our latest projection for
structural borrowing, this
mandate therefore provides
the Chancellor with
headroom of 1.7% of GDP by
2022-23 – equivalent to
£39.5bn
Source: OBR, ONS and RF calculations

14. But is it enough to meet the £31bn ‘end-of-austerity’ price tag?
Answer:Yes
14
The fiscal mandate specifies
getting the structural deficit
below 2% of GDP “by 2020-
21”, implying that it must
remain below this level in all
subsequent years. Relative
to our latest projection for
structural borrowing, this
mandate therefore provides
the Chancellor with
headroom of 1.7% of GDP by
2022-23 – equivalent to
£39.5bn
Source: OBR, ONS and RF calculations

15. And Chancellor hinted back in March that he would be prepared to make use
of some of his fiscal mandate headroom to support an increase in spending
15
Philip Hammond, Spring Statement 2018 speech, 13 March 2018
If, in the Autumn, the public finances continue to reflect
the improvements that today’s report hints at then, in
accordance with our balanced approach, and using the
flexibility provided by the fiscal rules, I would have capacity
to enable further increases in public spending and
investment in the years ahead

16. With this now forming one part of his expected double Brexit “deal dividend”
– suggesting he could offer some conditional spending plans at the Budget
16
Philip Hammond, interview with Kamal Ahmed, BBC, 12 October 2018
I will maintain fiscal firepower so that if we do find that things don’t
turn out the way we want, we have got the ability to support the
British economy and minimise any effect. But if we don’t need that
fiscal firepower then of course it can be used for other things,
either support for public services or further paying down of debt or
indeed reducing taxes

17. But look again at whatTheresa May said: ‘ending austerity’ must be
delivered alongside lowering debt
17
Theresa May, Conservative conference speech, 3 October 2018
Sound finances are essential, but they are not the limit of our ambition…
when we’ve secured a good Brexit deal for Britain, at the Spending Review
next year we will set out our approach for the future. Debt as a share of the
economy will continue to go down, support for public services will go up.
Because, a decade after the financial crash, people need to know that the
austerity it led to is over and that their hard work has paid off.

18. So can the Chancellor do both through borrowing alone?
18
The debt target specifies that
debt must be falling as a share
of GDP “in 2020-21”. Even on
the existing deficit trajectory
this rule is barely met (and only
due to the unwinding of the
Bank of England’s Term Funding
Scheme in that year)
Running a higher deficit
therefore breaks the rule
relatively quickly
Source: OBR, ONS and RF calculations

19. So can the Chancellor do both through borrowing alone?
Answer: No
19
The debt target specifies that
debt must be falling as a share
of GDP “in 2020-21”. Even on
the existing deficit trajectory
this rule is barely met (and only
due to the unwinding of the
Bank of England’s Term Funding
Scheme in that year)
Running a higher deficit
therefore breaks the rule
relatively quickly
Source: OBR, ONS and RF calculations

20. 20
• The task the Chancellor has been given at next week’s Budget – of simultaneously
‘ending austerity’ while still lowering debt as a share of GDP – is undoubtedly a
difficult one
• But it is likely to be made significantly easier by a very large upgrade in the OBR’s
public finance forecasts.That upgrade will mean that the light at the end of the
tunnel will be more clearly visible than it has been for some time, and it should
offer the Chancellor the opportunity to deliver a Budget that raises spending in key
areas without having to raise taxes
• But if he is to be able to truly declare that austerity is over, then he must at some
point tackle the more difficult decisions around tax
Conclusion? Simultaneously ‘ending austerity’ and lowering debt means tax
rises are back on the agenda… though maybe not just yet

21. TUNNELVISION
Autumn Budget 2018 and ‘ending austerity’
Matt Whittaker
October 2018
@MattWhittakerRF @resfoundation
21

22. Light at the end of the tunnel?
Will it be an ‘end of austerity’ Budget?
22
Nick Macpherson, former Permanent Secretary at theTreasury
Anneliese Dodds, ShadowTreasury Minister
Matt Whittaker, Deputy Director of the Resolution Foundation
Torsten Bell, Director of the Resolution Foundation
October 2018
@resfoundation #Budget2018
Wifi: 2QAG_guest password: Welcome_Guests

23. Light at the end of the tunnel?
Will it be an ‘end of austerity’ Budget?
Nick Macpherson, former Permanent Secretary at theTreasury
Anneliese Dodds, ShadowTreasury Minister
Matt Whittaker, Deputy Director of the Resolution Foundation
Torsten Bell, Director of the Resolution Foundation
24 October 2018
Thank you for joining
@resfoundation #Budget2018