Chancellor Jeremy Hunt is to spend about £3bn in his March 15 Budget to shield UK households from higher energy bills, but new economic forecasts mean he will have little room for big giveaways.
The chancellor has been handed draft forecasts by the UK fiscal watchdog showing the economy will barely meet his fiscal rule to have public debt as a share of output falling in five years’ time.
This prediction has severely impaired Hunt’s ability to consider Conservative MPs’ demands for big and immediate tax cuts in the Budget.
But Hunt has urged Tory MPs to be patient and says he hopes to start the process of tax cuts, particularly for business, in his Autumn Statement, by which point he hopes to have a better outlook for the public finances.
“We were hoping recent positive economic news would give us extra room for manoeuvre this time, but it hasn’t quite happened,” said one government insider.
Hunt has secured an unexpected £30bn windfall in the public finances, partly from higher than anticipated tax receipts in 2022-23, and this means he can provide some one-off help to households in the Budget.
He is expected to make the government’s “energy price guarantee” more generous for three months from April, keeping the average annual household bill at £2,500 rather than increasing it to £3,000, according to government insiders, at a cost of about £2.7bn.
Hunt also accepts he will have to pump billions of pounds more into the Ministry of Defence budget over the next two years to buy equipment and weapons, including ammunition, said the insiders.
Defence secretary Ben Wallace is said by government officials to be seeking about £10bn over two years to partly cover the effects on his department of supporting the war in Ukraine.
One expensive item of spending Hunt has already pencilled in for the Budget is to continue with Tory chancellors’ practice of freezing fuel duty in line with inflation. This is likely to cost almost £6bn every year.
The Treasury declined to comment on Budget “speculation” but Hunt has made it clear to ministerial colleagues that for now he will expect any extra funding for public sector pay deals to come from existing departmental budgets.
Ministers are trying to bring an end to the worst series of public sector strikes in decades involving NHS staff, teachers and civil servants, who want higher pay amid the cost of living crisis.
Hunt’s core problem for the March Budget is that the Office for Budget Responsibility, the UK fiscal watchdog, has not provided much headroom for additional government spending in its draft forecasts.
Alongside the Budget, the OBR is expected to raise its estimates for economic growth this year and next because its November forecast is now out of line with official data and predictions by independent analysts.
But the OBR is poised to cut its estimates for growth after 2025 on a judgment that there is less scope for a rapid economic recovery in the middle of the decade.
The slower growth anticipated for 2026 and 2027 compared to November would make it more difficult for the chancellor to hit his fiscal rule on debt.
Hunt indicated last month that better tax revenues and lower wholesale gas prices had not improved the public finances outlook when measured against his fiscal rule.
“It’s unlikely that we’ll have the headroom to do anything major [in the Budget],” he said.
Hunt has received the fourth round of draft forecasts from the OBR this week and government insiders said the core economic and public finances numbers are now nearly finalised.
FT calculations suggest the public finances will show improvements compared with November, but these gains have been offset by the past month’s increase in market interest rates.
The very large improvement in the public finances this year and next, reflecting better economic performance and lower gas prices, dissipates and slower growth later makes the chancellor’s debt rule harder to meet.
But by the autumn, Hunt is expecting that his leeway for pre-election tax cuts and prospects for money to resolve public sector strikes will have improved because his fiscal rule will shift from a calculation in 2027-28 to 2028-29, giving more time for debt to be falling as a proportion of GDP.