(Bloomberg) -- UK Chancellor of the Exchequer Jeremy Hunt will pledge to drive economic growth by unblocking business investment in his first budget on Wednesday, in which he will set out tax-and-spend policies for the last full year before the next election.

Having stabilized the economy in November’s autumn statement after the turbulence of Liz Truss’s short-lived government, Hunt will pledge to “deliver the next part of our plan: a budget for growth,” according to prepared remarks released by the Treasury. 

He will deliver “long term, sustainable, healthy growth by removing the obstacles that stop businesses investing, tackling labor shortages and harnessing British ingenuity to make us a science and tech superpower.”

The most pressing issues he faces are high inflation, weak growth, the cost-of-living crisis, strikes and labor shortages. To complicate matters, the Office for Budget Responsibility is expected to say he has barely any money for permanent giveaways.

With the UK tax burden at a post-war high and public services creaking, he will struggle to raise taxes or find savings. That points to a tricky balancing act for the Chancellor and Prime Minister Rishi Sunak’s government.

“There are plenty of demands on the chancellor for a loosening of the purse strings,” George Buckley, an economist at Nomura, wrote in a note to clients. “It looks like fiscal conservatism with a small ‘C’ will win the day.”

The statement is due at 12:30 p.m. London time. Following are the issues likely to come up: 

GDP Forecasts

In November, the OBR expected the economy to shrink 1.4% this year. The average of independent forecasts is now a 0.7% decline. An upgrade is expected but GDP will still contract. 

Even so, the spending watchdog is likely to judge that Sunak is on track to meet his goal of halving inflation and returning to growth by the end of the year.   

Longer-term, the OBR was too optimistic in November about the UK’s potential, with growth of 2.7% in 2026 and 2.2% in 2027. A downgrade is expected at the back end of the forecast. 

The combined changes will leave output in 2028 largely unchanged from November.

Read more: 

  • UK Economy Seen Sputtering Below Pre-Pandemic Levels Until 2024
  • Rishi Sunak Hails UK Economic Resilience After GDP Bounces Back
  • Britain Holds Up Better Than Expected in Cost-of-Living Crisis

Public Finances

Borrowing for 2022/23 is running about £30 billion below the OBR’s forecast, since the economy delivered more tax revenue than expected. Short-term, some of that is expected to persist and give Hunt a bit of headroom for temporary giveaways. 

Across the five years of the forecast, borrowing will be lower than previously expected. However, growth downgrades at end of the forecast will push Hunt close to breaking his fiscal rule that debt must fall as a share of GDP in 2027/28.

Hunt had £9 billion of headroom against the debt rule in November, a historically small margin, and wants to maintain that at least.

Cost of Living Support

There will be two main measures to help households with the cost of living. A three-month extension of the energy price guarantee was announced on Wednesday morning, ahead of the main budget speech, leaving the typical annual household energy bill at £2,500 a year, rather than raising it to £3,000. That will cost £3 billion, the Treasury said. After that, lower energy prices in wholesale markets are pointing toward bills falling below £2,500. 

Fuel duty is expected to be frozen, rather than rise the scheduled 23%, costing £6 billion permanently.  

Read more: UK Household Energy Bills to Rise Despite Lower Ofgem Cap (1)

Back to Work

A number of policies are expected to tackle the UK’s inactivity problem, which is causing staff shortages as people have dropped out of the labor force. Working-age inactivity is almost 490,000 higher than before the pandemic. Of that, 320,000 is among 50- to 64-year-olds. 

To tempt many skilled and better-off workers back, including doctors, Hunt is expected to raise the lifetime pension allowance from £1.07 million to £1.8 million. That would allow people to build up more tax-free savings for when they retire.

Low-income households will get more childcare support to encourage them move off benefits and into work. One official said Tuesday that a free child care will be expanded to cover one- and two-year-olds will be one of the key measures that Hunt announces. 

The long-term sick, who account for four-fifths of the increase in inactivity since the pandemic, will also keep their health benefits for longer when taking a job.

Investment Plan

Corporation tax rises from 19% to 25% in April, when the 130% super-deduction tax break on investment is scrapped. Business groups have called it a double whammy that will deter investment. Hunt has signalled investment is key to the government’s growth plans.

Under consideration is a full-expensing regime on plant and machinery to replace the super-deduction. That would mean companies would continue to get 25p off their tax bills for every £1 investment. As the policy would cost £11 billion a year, Hunt may choose a more targeted measure and limit it to just three years. That way it would expire before 2028, when his fiscal rules bite.

More broadly, many Conservative members of Parliament are looking for a growth plan to jolt the economy out of stagnation and see corporation tax as a totemic issue.

Read more: 

  • UK Plans £11 Billion Full Expensing Business Tax Break in Budget
  • Hunt Considers Budget Tax Breaks to Spur UK Business Investment
  • Hunt Should Ease Business Tax in UK Budget, CPS Think Tank Says

Leveling Up

Hunt will announce plans for 12 new investment zones with attractive tax rates for businesses to “supercharge” growth in those areas. Eight of the zones will be in England and the other four in Scotland, Wales and Northern Ireland.

Read more: 

  • ‘Levelling Up’ Scorecard Shows UK Regions Falling Further Behind
  • Five Reasons Why Levelling Up Has Stalled (Video)

Public Sector Pay

Public sector strikes by health workers, teachers, civil servants and rail workers form the uncomfortable backdrop to the budget, with more days lost to industrial disputes since June than in any year since the late 1980s. 

On budget day itself, more than 100,000 public service workers are on strike – from teachers to London Underground workers. The Treasury has offered 3.5% pay rises. Every 1% more costs £2.5 billion. However, the government is unlikely to commit more money in the budget.

Read more: 

  • UK Loses Another 220,000 Days to Worst Strikes Since Thatcher

--With assistance from Eamon Akil Farhat and Todd Gillespie.

(Updates with energy-price cap, expansion of free child care)

©2023 Bloomberg L.P.