Hitting the buffers

What could a weaker economic outlook mean for the Budget?

Transcript

1. Hitting the buffers What could a weaker economic outlook mean for the Budget? Dharshini David, Deputy economics editor at the BBC Jennifer McKeown, Chief Global Economist at Capital Economics James Smith, Chief Economist at the Resolution Foundation Chair: Ruth Curtice, Chief Executive of the Resolution Foundation Wifi 2QAG_Guest Welcome_Guests @resfoundation #HittingBuffers October 26
2. Pictures by Simon Dawson, images provided under license by https://creativecommons.org/licenses/by-nc-nd/4.0/, pictures were cropped. @resfoundation 2
3. “[Budget 2025] takes place against a difficult economic backdrop… “…we will make the tough but fair decisions” Pictures by Simon Dawson, images provided under license by https://creativecommons.org/licenses/by-nc-nd/4.0/, pictures were cropped. @resfoundation 3
4. “[Budget 2025] takes place against a difficult economic backdrop… “…we will make the tough but fair decisions” “[Budget 2026] is going to be challenging… “We will take difficult decisions to make sure the economy remains on track.” Pictures by Simon Dawson, images provided under license by https://creativecommons.org/licenses/by-nc-nd/4.0/, pictures were cropped. @resfoundation 4
5. “[Budget 2025] takes place against a difficult economic backdrop… “…we will make the tough but fair decisions” “[Budget 2026] is going to be challenging… “We will take difficult decisions to make sure the economy remains on track.” But let’s also spend more on defence, social care, nationalisation and house building… Pictures by Simon Dawson, images provided under license by https://creativecommons.org/licenses/by-nc-nd/4.0/, pictures were cropped. @resfoundation 5
6. There has been good news! Quarterly growth in real GDP, chained-volume measure, outturn Bank of England and OBR forecasts: UK The UK has been the fastest growing G7 economy in H1 2026 Notes: Bank of England forecasts are converted to smoothed quarterly averages after the first four quarters of data. Small revisions to GDP included in the Blue Book are not used in the outturn data as they came too late for the OBR to use in its forecast. Source: RF analysis of ONS, National Accounts; Bank of England, Monetary Policy Report, various; OBR, Economic and Fiscal Outlook, various. @resfoundation 6
7. Middle East conflict has given us a renewed cost of living crisis Consumer price inflation, outturns and projections: UK Source: ONS, Consumer Price Inflation; OBR, Economic and fiscal outlook, March 2026; Bank of England, Monetary Policy Report, various; 'The outlook for inflation', speech by Clare Lombardelli, September 2026. @resfoundation 7
8. Middle East conflict has given us a renewed cost of living crisis Consumer price inflation, outturns and projections: UK Source: ONS, Consumer Price Inflation; OBR, Economic and fiscal outlook, March 2026; Bank of England, Monetary Policy Report, various; 'The outlook for inflation', speech by Clare Lombardelli, September 2026. @resfoundation 8
9. Interest rates are much higher than at the Spring Forecast 10-year government bond yields: high-income OECD countries Source: RF analysis of OECD, Long-term interest rates; Bank of England, Yield Curves. @resfoundation 9
10. We estimate headroom has halved Estimated changes to the OBR forecast for public sector net borrowing since the Spring Forecast: UK Based on our update of the OBR forecast, headroom falls from £24bn to £12bn in 2029-30 Notes: Chart shows the impact on borrowing of changes in asset prices in the 10 days to 18 September combined with estimates of the impact of changes to the economy outlook. Excludes policy announcements since the Spring Forecast. Source: RF analysis of OBR, Economic and Fiscal Outlook, various; and Bank of England, Monetary Policy Report, July 2026. @resfoundation 10
11. Images provided under license by https://creativecommons.org/licenses/by-nc-nd/4.0/. @resfoundation 11
12. Key challenge 1: support families… Historical and forecast annualised default tariff cap levels, direct debit customers with typical consumption Notes: Assumed TCDVs of 2,700 kWh electricity and 11,500 kWh gas in line with 2024 Ofgem price cap. Source: RF analysis of Ofgem; BEIS; Cornwall Insight. @resfoundation 12
13. …but also keeping borrowing falling PSNB, forecasts and outturns and cyclically-adjusted net borrowing relative to long-run average (right panel): UK We can’t repeat blanket support because: Inflation and interest rates are high; We need to end failure to cut borrowing; Fiscal policy loosening not warranted Notes: Historical average for cyclically adjusted primary borrowing is taken from 1980 to 2007. Source: RF analysis of OBR, Public sector finances databank and Historical forecast database. (We estimate borrowing falling by £5bn pre-measures) @resfoundation 13
14. We need targeted energy support • Government should launch a temporary scheme targeting HHs where no one has an income >£24k • Would extend beyond benefit recipients, save eligible households £175 on average, and cost £2 billion overall • Extending Warm Homes Discount is a second best @resfoundation 14
15. Unfreezing LHA would help those facing hardship Change in annual income from unfreezing LHA and increasing the UC taper, by income vigintile: UK, 2029-30 Notes: The chart models the impact of increasing the UC taper from 55 per cent to 58 per cent. We assume that unfreezing LHA would mean rebasing rates to the 30th percent rent level measured in the 12 month to September of the previous year. Source: RF analysis of DWP, Households Below Average Income using the IPPR Tax-Benefit Model. @resfoundation 15
16. Key challenge 2: repair the public finances Average headroom held against fiscal rules: UK, June 2010 – October 2026 We think the Chancellor should hold £20bn+ of headroom Notes: Previous headroom estimates have been taken from the chart "Probability of meeting and headroom against fiscal mandate" in previous OBR Economic and Fiscal Outlook reports. The hypothetical estimate for John Healey is calculated by scaling Rachel Reeves’ £24bn headroom in year four of the March 2026 forecast with an error-adjusted ratio for year three of the forecast Source: RF analysis of OBR, Economic and Fiscal Outlook, March 2025, November 2025 and March 2026. @resfoundation 16
17. That means living within current settlements – which is tough Index of real per capita RDEL for unprotected departments (2009-10=100), by scenario Notes: Immediate pressures total £3.7 billion in 2029-30 and mainly comprises the Defence Investment Plan and higher than expected teachers’ pay. Each scenario includes the pressures from preceding one, for example the defence to 3 per cent of GDP also includes higher teachers’ pay. Source: RF analysis of OBR, HMT @resfoundation 17
18. …and raising some revenue: • Higher bank surcharge and increase in mansion tax has been rumoured… • ….but we would: close CGT loopholes, apply NI to partnership income, reduce VAT threshold, and increase dividend tax, raising over £9bn • Tax ‘switch’ could help raise money to fund defence spending @resfoundation 18
19. Key takeaways: • Need a Budget that faces up to our problems, rather than ducking them • Two challenges: providing cost of living support and repairing the public finances • Met with a three-part strategy: • Providing targeted support to the families facing hardship (while also keeping borrowing falling) • Setting out tax rises which repair the public finances and improve the system • Keeping a tight grip on spending (and, ideally, set out SR envelope) 19
20. Hitting the buffers What could a weaker economic outlook mean for the Budget? Dharshini David, Deputy economics editor at the BBC Jennifer McKeown, Chief Global Economist at Capital Economics James Smith, Chief Economist at the Resolution Foundation Chair: Ruth Curtice, Chief Executive of the Resolution Foundation Wifi 2QAG_Guest Welcome_Guests @resfoundation #HittingBuffers October 26
21. RESOLUTION FOUNDATION, OCTOBER 2026 Global Backdrop to the UK Budget Jennifer McKeown, Chief Global Economist jennifer.mckeown@capitaleconomics.com
22. World GDP (% y/y) 5 5 CE Forecasts 4 4 3 3 2 2 1 World 1 World Ex. GCC 0 0 -1 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 -1 Source: LSEG, Capital Economics
23. Oil Market Balance & Brent Crude Price 8.0 6.0 110 Market Balance (Mn. BpD, LHS) Brent Oil Price (US$ pb, Q. avg., RHS) 100 4.0 2.0 90 0.0 80 -2.0 -4.0 -6.0 -8.0 70 CE Estimates and Forecasts 60 Sources: LSEG, EIA, Capital Economics 23
24. Job Vacancy Rates (z-score) 4 4 Euro-zone 3 3 US 2 2 UK 1 1 0 0 -1 Labour market looser -2 -3 2002 2005 2008 2011 2014 2017 2020 2023 -1 -2 -3 2026 Sources: LSEG Data and Analytics, Capital Economics 24
25. Policy Interest Rates (%) US Euro-zone UK 7 6 Dashed lines are OIS-implied policy rates as of 12th Oct 7 6 5 5 4 4 3 3 2 2 Forecasts 1 0 2023 2024 2025 2026 2027 2028 1 2029 0 Sources: LSEG, Capital Economics 25
26. Changes in 10-Year Gov’t Bond Yields Since 27th Feb (bp) 180 Iran war begins 160 140 France 180 Germany 160 140 UK 120 120 US 100 100 80 80 60 60 40 40 20 20 0 Jan-26 0 Mar-26 May-26 Jul-26 Sep-26 Sources: LSEG, Capital Economics 26
27. Government Budget Balance (% of GDP) 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 -10 -10 -12 UK (OBR Mar. 2026 Forecast) -14 France (CE Forecast) F'casts -12 -14 -16 -16 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 Sources: LSEG Data & Analytics, Capital Economics 27
28. Key Messages • Challenges facing the UK economy and bond market should ease • Global growth has been resilient to the energy shock and world inflation will peak soon before easing in 2027 • Policy rates will rise less than markets expect across major economies • But risks are skewed to the upside for inflation/downside for activity • The UK is not France, but there is very little room for policy missteps and maintaining fiscal credibility will be crucial 28
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30. Hitting the buffers What could a weaker economic outlook mean for the Budget? Dharshini David, Deputy economics editor at the BBC Jennifer McKeown, Chief Global Economist at Capital Economics James Smith, Chief Economist at the Resolution Foundation Chair: Ruth Curtice, Chief Executive of the Resolution Foundation Wifi 2QAG_Guest Welcome_Guests @resfoundation #HittingBuffers October 26