The Chancellor is expected to outline measures to tackle the cost of living in her Budget by curbing energy, travel, and other household bills
Rachel Reeves is expected to reveal plans to address the cost of living crisis in the upcoming Budget by reducing energy, transport, and other domestic expenses. Treasury insiders believe the Chancellor’s campaign to slash regulated prices will simultaneously help drive down inflation and, consequently, the Government’s borrowing expenses.
Officials are understood to have pressed the Office for Budget Responsibility (OBR) – the official fiscal watchdog – to factor in reduced inflation and interest rates when preparing its economic projections, which will dictate how much Reeves can allocate while adhering to her own fiscal constraints.
Should the OBR accept this reasoning, it could provide Reeves with an estimated £6 billion windfall for her Budget calculations, according to Bloomberg Economics analysis.
The Chancellor is facing a £35 billion deficit triggered by weaker growth predictions, increased debt interest, and the expense of reversing planned welfare reductions. Any decrease in borrowing costs could therefore prove vital in preventing deeper spending reductions or fresh tax hikes.
A Treasury representative declined to comment prior to the OBR’s forecast, scheduled for November 26, while the watchdog also refused to be drawn.
Reeves has pledged to utilise her maiden Budget to ‘bear down on the costs that people face’ – particularly in sectors where the Government controls prices, such as energy bills, rail fares, and air passenger duty. She has already dropped hints about plans to reduce VAT and green levies on domestic energy, freeze duty on alcohol and tobacco, and curb increases in transport costs.
Economists at Santander and Pantheon Macroeconomics anticipate a ‘meaningful package’ to alleviate the strain on household budgets. Officials reckon that if these measures manage to slash inflation by approximately 0.5 percentage points, it would provide the Bank of England with the leeway to lower interest rates more swiftly.
This would represent a significant shift considering the UK currently has one of the highest borrowing rates in the G7 at 4%, with inflation stubbornly hovering at 3.8% – nearly double the Bank’s 2% target.
Bank of England Governor Andrew Bailey has publicly urged the Government to take action, stating that reduced regulated prices could shave “another half a percentage point or so” off services inflation and aid in steering the economy back towards stability.
The Treasury’s argument hinges on the belief that decreased inflation and interest rates would automatically reduce the cost of servicing the UK’s enormous debt pile, thereby freeing up more space in the public purse.
Last year, the OBR made a contrary adjustment, increasing borrowing cost assumptions following a spike in market rates. Treasury insiders are of the opinion that the watchdog should now reverse this move, reflecting declining expectations for inflation and stricter fiscal policy.
Markets have already factored in a severe economic downturn following anticipated tax increases of up to £30 billion, which investors reckon will suppress demand and assist in cooling inflation.
Should Reeves manage to convince the OBR to concur, it would represent a welcome piece of positive news for the Chancellor before a pivotal Budget that she maintains will concentrate on “fairness, stability and growth” – whilst also reducing living costs for millions of households.