Jeremy Hunt is going to let a lot of people down in his budget next Wednesday as the chancellor looks set to resist calls to rescue a flat economy by setting the course in his November autumn statement to balance the books.
businesses. Family. Former Prime Ministers are also bound to be disappointed.
Families seek extension of energy support over summer. Companies are crying out for some leniency, at least for the six point corporation tax hike. There is and will not be a risk.
Bound by its fiscal rules of reducing debt stocks and capping day-to-day borrowing at three per cent of GDP, the March 15 budget will be a quiet affair, focused on reducing government support and sticking with tax hikes.
There may be a slight cut in tax here or a slight increase in expenditure there. But Hunt and Prime Minister Rishi Sunak will save meat until the next election, which is due before the end of January 2025.
“The crowd-pleasing tax cut is likely to come too close to the election, and away from our current period of high inflation, it is unlikely to happen in an upcoming budget where tax policy changes markedly,” James Smith, research director Sankalp Foundation told the media.
So what exactly would Hunt do? Or, a better question, what can he do?
The aim of any chancellor is to ensure that their tax and spending decisions keep them within the confines of their own financial rules.
Recent developments have made the near-term outlook much better for the public.
Hunt calculated that reducing spending on the £2,500 energy bill freeze from energy prices falling below the level of the Russia–Ukraine war has saved around £11 billion (part of this saving comes from an energy company windfall tax). offset by lower receipts).
Carl Emerson, deputy director of the Institute for Fiscal Studies, said: Expectations of a much lower interest rate than in November and faster than projected inflation would curb debt interest spending, with Hunt expected to lose “something like £10bn a year (but still will be higher) loan interest expense than expected a year ago).
In short, borrowing this year and next is estimated to be around £30 billion less than the Office for Budget Responsibility (OBR) forecast a few months ago.
However, the official forecaster has told Treasury officials it has downgraded its long-term GDP forecasts, which could wipe out almost all of Hunt’s breathing space in the coming years.
“This will likely leave the chancellor with a “headroom” of £8bn against her fiscal target…compared to £9.2bn in November,” said Ruth Gregory, deputy chief UK economist at Capital Economics.
Low growth cuts into government revenue due to layoffs and reduced spending.
So Hunt has some near-term firepower, which it can generate from savings on a lower debt interest bill and less expensive energy support packages.
But much of this will be eaten up by structurally weak GDP growth.
Although Treasury officials have said no decision has yet been made on fuel duty, the Chancellor is almost certain to freeze it again, which is costing him around £6bn.
It was about to rise sharply, which the OBR included in its November forecasts.
No chancellor has allowed it to jump since 2011.
Lukasz Krebel, an economist at the New Economics Foundation, told CityAM: “It would be a bad decision – apart from climate considerations, fuel duty cuts benefit the richest households, who are more likely to drive petrol-hungry SUVs. Are.”
There’s a chance he’ll “bring in tax softening set to kick in April,” thinks UK economist Samuel Toombs, chief of Pantheon Macroeconomics.
He “sees an opportunity in increasing the income tax personal allowance to demonstrate that his careful management of public finances is bearing fruit”.
A surprise move could be for the chancellor to “ask the Bank of England to stop paying interest on part of its reserves,” Smith said.
Doing so would ease pressure on public finances by reducing payments to the Bank of England from the Treasury to cover the difference between the gains on bonds bought by the central bank under quantitative easing (QE) and payments on reserves .
The bank recently posted its first loss on QE bonds due to rising interest rates. Bond prices have fallen sharply over the past year, driven by higher rate expectations, as yields have been higher.
The Bank made a profit of almost £4 billion on the bonds it bought after the mini-budget, money that went back to the Exchequer.
Hunt is also reportedly considering reducing the corporation tax hike from 19 per cent to 25 per cent and expanding investment tax relief to 130 per cent.
There may also be some changes in pension tax relief.
One advantage of launching temporary aid packages to cushion economic shocks is that the Chancellor can use short-term financial shocks to cushion or extend them, as long as they are truly time-limited.
The energy price cap is set to jump to £3,000 from April, a decision made at a time when international gas prices were skyrocketing and the Treasury was looking to limit its exposure to energy market movements.
With prices falling heavily since the start of the summer, energy regulator Ofgam is set to keep the cap below £2,500, meaning Hunt will only have an extra three months to help families with their bills There will be a need to increase expenditure.
According to the Resolution Foundation, it would cost just £3bn to keep the cap at its current level.
With almost 900,000 fewer people being economically active, the UK is suffering from a peculiar decline in workforce participation since the start of the COVID-19 crisis.
Hunt has devoted large chunks of speeches since the start of the year to getting these people back to work, with a particular focus on early retirees.
However, a group of experts has urged him to focus on mothers and people with disabilities, not older Brits who are unlikely to be back on the golf course.
The Center for Progressive Policy, Oxford Economics, the Confederation of British Industry and other economic groups have urged Hunt to increase childcare support to boost labor market participation.
Public sector pay awards are also being weighed up by Chancellor and Prime Minister Rishi Sunak.
In short, next week’s budget is ready to move cash around, but doesn’t expand the actual public spending envelope or raise taxes meaningfully: a placeholder budget that sets us up to run until the next election .
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