Economists from Capital Economics predict that Labor could benefit from a £16bn spending boost if it wins the next general election, thanks to updated forecasts from the Office for Budget Responsibility (OBR).
This potential financial boost is almost double the £8.9bn announced in the March Budget.
Rachel Reeves, Labour’s shadow chancellor, may use these revised forecasts to either reverse some of the planned spending curbs or address the freeze on personal tax thresholds, although she is unlikely to be able to achieve both at once.
The Office for Budget Responsibility’s improved borrowing forecast, revised downward by around £5 billion a year over the next five years, is due to increased tax revenues driven by recent wage growth. This shift provides the next government with an opportunity to re-evaluate its financial strategies.
If Capital Economics’ forecasts are correct, the next chancellor could have a fiscal space of £27bn, assuming bigger-than-expected interest rate cuts and higher-than-expected tax revenues from higher house and stock prices. However, the Office for Budget Responsibility’s forecasts can vary widely, with a range of scenarios from a deficit of £13bn to a surplus of £38bn, equivalent to 1.4% of GDP.
UK Deputy Chief Economist Ruth Gregory noted: “Overall, as things stand, we suspect that the next government may get a little more fiscal space from the Office for Budget Responsibility. But it is unlikely that it will have enough fiscal space to do all Whatever you want at once.”
Gregory stressed that economic developments and the Office for Budget Responsibility’s forecasts will significantly impact the fiscal space available, in addition to the new government’s willingness to raise taxes to finance additional spending beyond what the fiscal space allows.
The potential fiscal flexibility comes amid discussions about how best to use the expected surplus to balance spending and tax cuts, reflecting broader economic conditions and the incoming administration’s strategic priorities.