Rishi Sunak's budget delivery next week comes under the shadow of war and a hastening cost of living crisis.
He will have to contend with a tight balance sheet and a legacy of high spending during Covid, with unpopular tax hikes, and perhaps a few rabbits, coming out of his hat next Wednesday.
Borrowing
Borrowing between 2020 and 2021, at 15% of GDP, was at its highest since the end of the Second World War. The government had to borrow in every month between February 2020 and December 2021, racking up a £470bn bill on things like furlough and income support schemes.
But January was the first month the Sunak experienced negative borrowing as Chancellor, driven by rising income tax revenues, with the Chancellor keen to cut down on borrowing as inflationary pressures mount.
Nevertheless, economists believe the Chancellor has the wriggle room to add to borrowing with bond yields low and interest rates still near record lows.
Debt
Borrowing has added to debt levels not seen for nearly 60 years. Government debt, at 103.7% of GDP in March last year, is the highest the Government has faced since 1963, and well off the 80% target set by the Office for Budget Responsibility, owing £2.2bn in total.
Servicing costs on that debt will have caused concern for the Chancellor, both in the form of RPI-tied gilt-linked bonds, and rising interest rates expected to add to interest repayment costs.
Spending
Spending hit £1.093bn in 2021 following historic expenditure, with similarly high spending of £1.062 in 2022 budgeted as a legacy of Covid-related costs.
It means new spending should be modest. Defence is likely to see a slight uptick on the £54.5bn budgeted for this year in a symbolic move of strength against Russia.
New spending is also expected to come in the form of some alleviation of heating costs, expected to rise 54% for households in April.
In total, Ruth Gregory of Capital Economics expects the Chancellor to throw around £10bn at the cost of living crisis and the defence budget.
Tax revenue
To fund new spending and make up for Covid relief, Sunak is keen to start raising taxes in a longer term signal to Conservative frugality.
Income taxes, which along with VAT account for the UK’s biggest revenue drivers, rose for the UK in the last year as people came out of furlough.
The Chancellor’s pledge to raise National Insurance by 1.25 percentage points is expected to add £14bn to revenues, with a similar increase in dividend taxes hoped to add extra cash.
Sunak may also go after wealth by cutting corporation tax thresholds and changing the rules on ‘death taxes' linked to pensions and inheritance.
Tax reductions could be seen in fuel duty, with Gregory of Capital Economics suggesting a 5p cut to the flat rate, but the NI hike is likely to stay.