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Chancellor Jeremy Hunt has no choice but to provide for further reductions in public spending if he is to deliver big, vote-winning tax cuts in his March 6 Budget.
The latest forecast from the Office for Budget Responsibility (OBR), due to be delivered to No 11 this weekend, will not leave enough room for the scale of tax cuts needed to bolster core support for the Conservatives and move the electoral dial.
At the time of November’s Autumn Statement, it was estimated that the Chancellor had taken on up to £12 billion of unidentified reductions in public spending.
Hunt knows he can’t risk unfunded tax changes that could cause unrest in financial markets, potentially thwarting interest rate cuts and better mortgage deals for homebuyers.
Despite the UK economy falling into a shallow recession in the second half of last year, authorities remain confident that the slowdown is not enough to have a material impact on recovery prospects this year and in 2025, when Growth is expected to rebound to 1.4 percent.
Decision time: Jeremy Hunt has no choice but to plan further reductions in public spending if he wants to deliver big tax cuts that attract votes.
However, a key concern is that the scope for further tax cuts – beyond the £20 billion delivered in the Autumn Statement – ​​will erode sharply as inflation falls towards the 2 per cent target set by the Government. Government.
Fiscal drag – the revenue bonanza from freezing relief on income tax, capital gains tax and inheritance tax – will disappear as quickly as it came as inflation falls. As inflation falls, the additional revenue from pushing taxpayers to higher levels will also decline.
Hunt is keen to use that fiscal space as he needs to continue the drive towards greater productivity started in his Autumn Statement with employment and benefits reforms. Together with a one percentage point reduction in National Insurance contributions, this aims to make work profitable and improve labor supply.
In particular, he wants to encourage the 700,000 people who have left the labor market since Covid-19 arrived to return to work. The Chancellor is also keen to give more weight to the UK’s dynamic life sciences, IT and financial services industries.
Among the specific measures he is considering ahead of the Budget is ending the so-called tourist tax, the VAT levy on foreign visitors who take travelers to Paris, Milan and other cities. Having informally analyzed purchasing patterns, Hunt asked the OBR to go back to the drawing board and present an assessment by this weekend.
Previously, the OBR reported that it would cost £2 billion to restore VAT-free shopping for overseas visitors. But one forecaster, the Center for Economics and Business Research, says the move is robbing Britain of 11.2 billion pounds of domestic output.
The Chancellor is also interested in launching a British Isa, a tax-efficient individual savings account to attract private investors into funds that invest in UK-listed companies.
British pension funds have diverted investment from shares listed on the London stock market to government bonds.
Only 4.7 percent of shares in the FTSE 350 – the index of the 350 largest companies listed on the London Stock Exchange – are held by British pension funds, undervaluing UK shares and strengthening private equity and foreign acquisitions.
January’s official public finance data suggested the Chancellor has between £12bn and £15bn of room for tax and spending changes, down from previous estimates of £24bn.
The extra cash is a result of the OBR underestimating savings from lower market interest rates and the impact of falling inflation on indexed government bonds.
In January alone, the Government’s debt interest bill fell to £4.1 billion, which is £2.7 billion less than the £7.1 billion predicted by the OBR .