Ahead of the 'mini budget' planned by new chancellor Kwasi Kwarteng on Friday, various new policies are expected to be announced and with interest payments on government debt already at record levels, many are asking how the government intends to pay for them.
This emergency budget is being billed as where the chancellor of the exchequer and prime minister Liz Truss will unveil their main weapons to supposedly stimulate economic growth and to ease the cost-of-living squeeze via tax cuts for both consumers and businesses.
There have been whispers of reversing the hike to national insurance (NI) that came into effect in April as well as the planned increase of corporation tax from 19% to 25% next April.
Scrapping the NI uplift could result in an annual saving of under £100 for someone earning £20,000, rising to £468 for someone earning £50,000.
There has also been news of a stamp duty cut – a tax on property purchases - as part of Friday’s fiscal event, which sent shares in housebuilders jumping higher on Wednesday.
“It sounds like they’re going to cut national insurance, corporation tax and stamp duty, and in the future there are plans to cut income tax as well,” said Paul Dales, chief UK economist at Capital Economics.
There is the possibility that the chancellor could also bring forward the 1p income tax cut that was earmarked by his predecessor, Rishi Sunak, for 2024, or raise the personal allowance.
The income tax change would amount to tax savings of £74 for workers earning £20,000, £174 for someone earning £30,000, £374 for someone with a £50,000 pay packet, or £874 for employees with an income of £100,000.
What has already been announced
On top of all this, Truss already announced several energy support packages earlier this month.
Her new plan will freeze energy prices for an average family at £2,500 for two years, which would be roughly £1,000 less than the proposed £3,500 energy price cap that was scheduled to start in October.
Most households will also receive a £400 support package.
Homeowners and most renters can expect their bills to amount to a maximum of £2,100 from October, which is still roughly double the level of the energy price before this year despite the financial aid.
This is expected to cost the government as much as £100bn, although the amount may well rise, according to IFS director Paul Johnson.
Deutsche Bank, however, said it expects the package to be nearer £200bn – which would be roughly half the scale of pandemic support measures and nearly double its initial estimate.
On Wednesday, the government also said business energy costs would be cut by around 45% for six months, which is expected to cost the taxpayer around £25bn.
Electricity prices for businesses will be capped at £211 per megawatt hour with gas capped at £75 for businesses, charities and public sector bodies.
The prime minister has also unveiled a new scheme with the Bank of England, worth up to £40bn, to help firms in the wholesale energy market stabilise prices and decrease the likelihood that suppliers will need to be bailed out.
How will all this be paid for?
All this spending comes at a time when interest payments on government debt were announced to have reached £8.2bn - their highest August level since records began.
The budget will also see new Chancellor reportedly set an official target of raising real GDP growth to 2.5% a year.
This, in turn, would be expected to raise tax revenues for the government to help partially offset the support packages and tax cuts.
“If you increase the size of the economy quite rapidly, debt and the amount borrowed shrinks relative to the size of the economy,” Dales explained.
He also said that the government’s plan is more of a short-term solution and could be seen as gambling on achieving its own targets.
Dales added: “It's a bit of a gamble because if you don’t manage to achieve that growth target, then at some point, you've got a situation where debt is looking very high compared to GDP and may even be rising relative to GDP if interest rates continue to rise.
“Then the government would need to change course by either raising taxes or cutting spending.”
Failure to meet the 2.5% goal would likely mean many of the expected Friday announcements would be reversed in coming years.