Jeremy Hunt is going to let a lot of people down at his budget next Wednesday as the Chancellor is poised to resist calls to save a flatlining economy by staying the course set in his November autumn statement of balancing the books.
Businesses. Families. Even former Prime Ministers are set to be disappointed.
Households want an extension of energy support into the summer. Companies are crying out for at least some softening to the six point corporation tax hike. There’s a risk neither will happen.
Bound by his fiscal rules of slashing the debt stock and capping day-to-day borrowing at three per cent of GDP, the 15 March budget will be a calm affair, focused on trimming down government support and sticking with tax rises.
There may be a small tax cut here or a slight spending rise there. But Hunt and Prime Minister Rishi Sunak will save the meaty giveaways until the run up to the next election, which has to happen before late January 2025.
“With crowd-pleasing tax cuts likely to come far closer to the election, and further away from our current period of high inflation, the upcoming budget is not likely to be one where tax policy shifts markedly,” James Smith, research director at the Resolution Foundation, told media.
So what will Hunt actually do? Or, a better question, what can he do?
The objective of any Chancellor is to ensure their tax and spending decisions keep them within their fiscal rules.
Recent developments have made the near-term outlook for the public much better.
Hunt is calculated to have pocketed an around £11bn saving from energy prices tumbling below their Russia-Ukraine war levels reducing spending on the £2,500 energy bill freeze (part of this saving has been offset by lower receipts from energy company windfall tax).
Carl Emmerson, deputy director of the Institute for Fiscal Studies, said: Much lower interest rate expectations compared to November and a faster than projected inflation drop will curb debt interest spending, handing Hunt “something like £10bn a year (but would still imply more debt interest spending than expected a year ago).
In sum, borrowing this year and next is now projected to be around £30bn lower than the Office for Budget Responsibility (OBR) forecast a few months ago.
However, the official forecaster has told Treasury officials it has slashed its long-term GDP forecasts, which could wipe out nearly all Hunt’s breathing space over the coming years.
“This will probably leave the Chancellor with “headroom” of £8bn against his fiscal target… compared to £9.2bn in November,” Ruth Gregory, deputy chief UK economist at Capital Economics, said.
Lower growth cuts government revenues due to people being sacked and spending less.
So Hunt has some near term firepower he could unleash, generated from savings on a lower debt interest bill and less costly energy support packages.
But most of this will be eaten up by structurally weaker GDP growth.
Although Treasury officials have said no decision has been taken yet on fuel duty, the Chancellor is almost certain to freeze it again, costing him around £6bn.
It was scheduled to rise sharply, which the OBR baked into its November forecasts.
No Chancellor has allowed it to jump since 2011.
“This would be a bad decision – apart from climate considerations, fuel duty cuts largely benefit the wealthiest households who are more likely to drive petrol-hungry SUVs,” Lukasz Krebel, an economist at the New Economics Foundation, told City A.M.
There is a chance he will “soften the tax rises set to kick in in April,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, thinks.
He sees “an even chance of him raising the income tax personal allowance, to demonstrate that his cautious stewardship of the public finances is bearing fruit”.
One surprise move the Chancellor may opt for is “asking the Bank of England to stop paying interest on part of its reserves,” Smith added.
Doing so would ease pressure on the public finances by reducing payouts from the Treasury to the Bank of England to cover a spread between what the central bank gains on bonds it purchased under quantitative easing (QE) and pays on reserves.
The Bank booked its first loss on the QE bonds recently due to interest rates rising. Bond prices have dropped sharply over the last year to account for higher rate expectations, forcing yields higher.
The Bank also booked a near £4bn profit on bonds purchased after the mini budget, money that has flowed back to the treasury.
Hunt is also reportedly mulling softening a corporation tax rise to 25 per cent from 19 per cent by watering down and extending the 130 per cent investment tax relief.
There could be some tweaks to pension tax reliefs as well.
One benefit of launching temporary support packages to soothe economic shocks is that Chancellors can use short-term financial windfalls to expand or extend them, so long as they’re actually time-limited.
The energy price cap is poised to jump to £3,000 from April, a decision made at a time when international gas prices were sky high and the Treasury wanted to limit its exposure to energy market movements.
A huge price climbdown since means, come the beginning of summer, energy regulator Ofgem is set to peg the cap at below £2,500, meaning Hunt would only need to step up spending to help families with their bills for around an extra three months.
According to the Resolution Foundation, keeping the cap at its current level would cost just £3bn.
Britain is suffering from a peculiar drop in workforce participation since the beginning of the Covid-19 crisis, with about 900,000 fewer people economically active.
Hunt has devoted big chunks of speeches since the turn of the year to luring these people back into work, with a particular focus on early retirees.
However a string of experts have urged him to focus on mothers and disabled people to plug employment gaps, not older Brits who are unlikely to come back from the golf course.
The Centre for Progressive Policy, Oxford Economics, Confederation of British Industry and other economic groups have urged Hunt to step up childcare support to boost labour market participation.
Public sector pay awards are also being weighed up by the Chancellor and Prime Minister Rishi Sunak.
In sum, next week’s budget is set to shift cash around, but not expand the actual public spending envelope or raise taxes meaningful: a placeholder budget to tide us over until the run up to the next election.