The chancellor could afford to raise public sector wages and provide targeted support with energy bills given the £166bn extra headroom.
Jeremy Hunt will have £166bn more headroom for the Budget next week amid a fall in gas prices and a surge in tax receipts.
National Institute of Economic and Social Research (NIESR) said persistent inflation has increased the chancellor's headroom, with the government expected to be running a surplus in real terms throughout the 2023-24 fiscal year.
"The chancellor finds himself with billions to spend," the NIESR said ahead of the Spring Budget.
The think tank said that Jeremy Hunt should allow public-sector wages to rise to catch up with the private sector, given private-sector wages have been rising much faster than public-sector wages of late.
“We can expect some spillovers from public-sector wage growth to the private sector, but any adverse macroeconomic effects need to be assessed against potential output losses if the public sector lost skilled workers,” it added.
Separate research has shown that delivering a 5.5% pay settlement, to make progress on closing the public-private sector pay gap and possibly resolve industrial disputes, would cost £5bn more than the 3.5% pay increase that departments say they can afford within current budgets.
The think tank also pushed for a more targeted approach to provide support for households to deal with the high energy prices, specifically, a combination of an opt-in Social Tariff system and a Variable Price Cap.
NIESR said this is preferable in fiscal terms to a universal EPG [energy price guarantee], as this might cost as much as £29bn for 2023-24, and would provide both incentives to users of energy to limit demand, and also more support to those households who need it most.
The think tank has calculated that the chancellor has a large amount of fiscal space ahead of his budget on 15 March, thanks to higher revenue and lower spending, together with the more favourable outlook for GDP and interest rates.
The Spring budget will be delivered in parliament on Wednesday, 15th March.
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