Finance minister Rishi Sunak has promised higher public spending and new tax cuts as the United Kingdom's economy rebounded more strongly from the COVID-19 pandemic than previously expected and he vowed to protect households from rising inflation.
Sunak used a half-yearly budget statement on Wednesday to announce multi-billion-pound investments to help Prime Minister Boris Johnson meet his "levelling up" promises to voters and ease a cost-of-living squeeze for low-earning households.
But the plan comes with a cost: the UK's budget forecasters said the state's tax take was on course to be its biggest since the 1950s thanks to hikes announced in March and September.
The OBR said the economy was likely to grow by 6.5 per cent in 2021, a lot faster than a forecast of 4.0 per cent made in March when the UK was still in a coronavirus lockdown.
"Today's budget does not draw a line under COVID. We have challenging months ahead," Sunak said.
"But today's budget does begin the work of preparing for a new economy post-COVID."
The higher growth forecast for 2021 meant the economy was expected to regain its pre-pandemic size at the turn of this year, not in the second quarter of 2022 as predicted in March although that was still later than in other countries.
Long-term damage to the economy would also be lower, with 2 per cent of output lost permanently compared with 3 per cent estimated before, the OBR said.
Sunak - who racked up the UK's biggest-ever peacetime budget deficit to combat the coronavirus - will now be able to borrow less than previously expected.
The OBR projected the deficit for the financial year to the end of next March would be equivalent to 7.9 per cent of economic output - down from its previous forecast of 10.3 per cent and almost half the size of last year's historic shortfall.
Sunak said every government department would get a real-term increase in spending and he promised the biggest increase in a decade in the core funding of local governments.
He announced new rules to govern borrowing: a commitment that underlying public sector net debt must be falling as a share of GDP and that day-to-day government spending must be balanced by revenues within three years.
On taxes, Sunak moved to lessen the hit for low-earning families from the recent end of a pandemic emergency top-up of welfare benefits which had been worth a combined six billion pounds ($A11 billion) a year to claimants.
He also cut business rates for a year for hard-hit sectors such as retail and hospitality and froze them for others.
Drinkers would be spared a planned increase in duty on alcohol worth more than 600 million pounds a year.
Sunak acknowledged the risks posed by rising inflation, much of which he blamed on problems in the global economy.
The OBR predicted inflation would hit almost 5 per cent next year and it said post-Brexit migration and trade rules had exacerbated supply bottlenecks in the UK.
"I understand people are concerned about global inflation - but they have a government here at home ready and willing to act," Sunak said.
He announced further measures to ease a shortage of truck drivers which has led to supply chain problems and said the increases in spending would be done "keeping in mind the need to control inflation".
A big risk for Sunak is that the recent jump in inflation proves to be more stubborn than expected, which could push up the government's debt costs sharply.
A quarter of UK gilts - government bonds - are indexed to inflation, more than most other rich economies.
A 1 percentage-point rise in interest rates and inflation would cost taxpayers about 23 billion pounds a year, according to government estimates.
That would be double the money that Sunak plans to raise via higher social security contributions to fund the health service and social care.
Borrowing costs could start to go up as soon as next week when the Bank of England announces its November policy decision.
Australian Associated Press