Philip Hammond is likely to see the headroom against his fiscal rule roughly halved from £26bn to £14bn, the think-tank said in a briefing paper today.
This is because the economy will be £44bn smaller in size than previously thought. The Office for Budget Responsibility (OBR) significantly reduced its forecasts for the UK’s economic productivity last month.
Borrowing could increase by £16.5bn, reducing the chancellor’s “room for manoeuvere” but increasing the “need for action”, the foundation stated.
Matt Whittaker, chief economist at the Resolution Foundation, said: “It looks likely that we are currently living through the worst decade for productivity growth since the start of the 19th century.
“The chancellor is likely to be much closer to breaking his fiscal rules, with additional pressure from higher interest rates and reversals on planned tax rises and welfare cuts.”
The government has less revenue coming in because of changes in policy, such as reversing tax hikes for self-employed people, announced in the spring Budget, the foundation stated.
It is also looking at raising the public sector pay cap and has decided not to include social housing in the Local Housing Allowance cap, which will cost it £385m in 2020/21 and £360m in the following year, the charity estimated.
The charity said it was therefore “crucial” that the Budget contained plans to help working families experiencing a squeeze on their living standards.
It called on the government to use “ultra-low” borrowing costs to embark on a large-scale programme of state investment in housebuilding, reversing cuts to universal credit and reducing the six-week wait for payments and ending the public sector pay cap.
Last month the Institute for Fiscal Studies questioned whether it was sensible for the chancellor to stick to the government’s aim of achieving a fiscal surplus by the mid 2020s amid weak economic forecasts.
