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The National Institute of Economic and Social Research (Niesr) has provided a pessimistic forecast, reflecting scenarios being considered by the Treasury ahead of the autumn Budget. The accumulation of U-turns and sluggish economic news has contributed to the framing of this important moment in Treasury planning. Chancellor Rachel Reeves may need to establish more flexibility to meet her borrowing limits with the current global uncertainties in mind. The buffer is currently set at a tight £10bn, but Niesr suggests the need for a larger buffer to avoid missing fiscal rules.
The borrowing rules dictate that government costs should be covered by tax income, with debt decreasing as a share of national income by 2029-30. Niesr does not recommend changes to the new borrowing rules at this stage, in line with suggestions from the IMF and others to limit Budget changes to once a year to reduce uncertainty. Given the potential budget gap of £40-50bn, initial estimates of £15-20bn may be too low, indicating a significant challenge for the chancellor. With spending largely fixed and welfare cut challenges, tax rises may become necessary.
Amidst mixed economic news, the upcoming Bank of England decision on interest rates and new economic forecasts, along with GDP figures for the second quarter, will provide further insight. Niesr has suggested potential changes to VAT, pensions allowances, council tax, and income tax thresholds to raise revenue. The prospect of tax rises looms large, with the need to address economic uncertainties and challenges in the coming months. The current economic landscape remains uncertain and challenging for policymakers and financial institutions alike
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