Chancellor Jeremy Hunt is set to be handed a multibillion-pound boost by official forecasters next week, paving the way for a package of pre-election tax cuts.
Leading economists predict that lower UK borrowing costs could give Hunt significantly more fiscal headroom in his March 6 Budget, paving the way for income tax cuts or further reductions in national insurance contributions.
The Office for Budget Responsibility will hand Hunt its first forecast before the Budget, with economists estimating the chancellor could be given about £6bn-£10bn of extra headroom against his fiscal targets.
Rishi Sunak, prime minister, said on Friday that there would be “more to come” in terms of tax cuts, with a focus on rewarding hard work and boosting growth.
Analysts at Capital Economics say lower market interest rate expectations will trim borrowing costs on the UK’s government debt, estimating it could boost Hunt’s headroom from £13bn at his Autumn Statement to £19bn.
However, that leaves aside other factors, including possible changes to the OBR’s economic outlook and new figures on public borrowing levels.
Paul Johnson, director of the Institute for Fiscal Studies, said it was “plausible” that Hunt’s headroom against his fiscal rules — which commit to cutting debt as a share of GDP in the fifth year of the forecast — could rise by £10bn, but cautioned there were many moving parts.
Johnson previously noted at the time of the Autumn Statement in November that any tax cuts were in the context of “the biggest tax-raising parliament in modern times”.
Asked about the prospects for tax cuts, Hunt said at the World Economic Forum in Davos he had not seen the first OBR forecasts, adding they could “vary right up to the last minute quite significantly”.
The first OBR forecasts will next week trigger a debate in government about what taxes to cut and by how much, with most of the focus on personal tax cuts.
Sunak, on a visit to Hampshire, said: “Our priorities are very clear. It is controlling spending and welfare so that we can cut people’s taxes.” He added: “The plan is working because we are already doing it — stick with it and there is more to come.”
An income-tax cut could be the biggest “headline-grabber”: a 1p cut in the basic 20p tax rate would cost about £7bn in 2026-27 and would help wealthier pensioners and people with investment income as well as workers.
However, Hunt chose in his Autumn Statement to instead cut the main rate of national insurance by two percentage points at a cost of £10bn, a narrower tax cut targeted at workers, which he said would boost the labour market. “There are pros and cons of both,” said a Treasury insider.
Treasury officials say Hunt has also left open the possibility of a pre-election cut to inheritance tax — an idea beloved by some Tory MPs — but the chancellor is said by his friends to be sceptical.
One government insider said: “The prime minister and chancellor have said the priority is growing the economy and rewarding work. IHT doesn’t neatly fit that mission.”
Senior Tories say an IHT cut is not entirely excluded if the OBR provides enough “headroom” in its forecast, but the move carries some political danger for the Conservatives.
Sir Keir Starmer, Labour leader, has vowed to oppose a cut in inheritance tax cut — paid by fewer than 4 per cent of estates — with Labour insiders saying the party would reallocate the lost revenues to more deserving causes.
Hunt has left open the possibility of holding a second “fiscal event” in the autumn — if Sunak delays an election until late 2024 — which could allow him to cut taxes again if the economic situation improves.
The weight attached to the OBR’s calculations is a reminder of the political power vested in the body, whose forecasts effectively determine the scale of any pre-election tax giveaway.
This month, Sir Jacob Rees-Mogg, former cabinet minister, called for the OBR to be abolished, while Tory MPs in the Conservative Way Forward group criticised the accuracy of the body’s forecasts.
“At a time when the British public are having to make every penny count, more must be done to ensure that the OBR’s errors are not holding back the country’s recovery,” they wrote.
The OBR, set up by former Tory chancellor George Osborne in 2010, says its forecasts stand up well to independent forecasts and are better than the ones that used to be produced in-house by the Treasury.
Treasury insiders say that Hunt is likely to “max out” whatever headroom he is given by the OBR against his fiscal rules, partly because of a desire to show taxes are now on a downward path.
But by reducing any fiscal room for manoeuvre for an incoming Labour government, Sunak will be able to bolster his claim that Starmer would have to increase taxes to fund his spending plans.
Some senior City figures are starting to get nervous that if Hunt cuts personal taxes before the election, an incoming Labour government may be forced to put up business taxes to fund strained public services.
The OBR’s forecasts are based on what the Resolution Foundation think-tank has called the Conservative government’s “fiscal fiction” that it would be able to squeeze public service spending in real terms after the election.