Challenging Times: The Economy Ahead of the Spring Budget - 9 March 2023
8 March 2023
If we assume that the share of taxes in GDP is the same in our forecast as in the OBR’s forecast, then the amount of fiscal space against the deficit target increases by a further £139.2 billion. [...] • A persistent rise in corporate taxes leads to a fall in investment and GDP in both the short run and – given the negative effect of lower investment on the capital stock and potential output – will fall in the long run. [...] In fact, supply slightly increases; this is largely due to the fact that the user cost of capital falls in these scenarios, given the endogenous response of the central bank, which cuts interest rates in response to the demand shock, and the investment premium falls as a result of changes in bank balance sheets as a result of the shock. [...] VAT is the most disruptive in the short run, hitting GDP, incomes, and unemployment the hardest; however, in the longer run to the economy stabilises after the initial hit. [...] Table E: Effects of the Rise in the EPG by Decile Source: LINDA 17 Figure 9: Effects of the Rise in the EPG by Decile EPG Raised to £3000, 5p Cut Reversed, Fuel Duty Uprated by Inflation (plus welfare support) Source: LINDA If, as now seems likely to be the case, the Chancellor decides to maintain the EPG at £2,500, not to reverse the 5p fuel duty cut, and not to uprate fuel duty by the rate of in.