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Jeremy Hunt has warned Conservative colleagues not to expect big tax cuts in his March 6 Budget, after a new set of internal fiscal forecasts showed he has dwindling room for manoeuvre.
Rising government borrowing costs since the start of the year have dented Hunt’s hopes of a big pre-election giveaway, such as a 2p cut in the rate of either national insurance or income tax, according to Tory officials.
“Those are out of the window based on the current forecasts,” said one Tory official briefed by Hunt. A 2p cut in national insurance would cost about £9bn and a similar cut to income tax about £13bn.
Having stoked Tory hopes of tax cuts earlier in the year, the chancellor is now rushing to suppress them. Treasury insiders admit they want to manage expectations, but insist the public finances have tightened.
The Financial Times revealed on Thursday that the squeeze has meant that Treasury officials are looking at slashing billions of pounds from public spending plans in the next parliament to fund pre-election tax cuts.
Such a move would imply serious cuts to frontline public services and fuel claims by leading economists that Hunt is trying to fund tax cuts using the “fiction” of tight spending control in future.
“I would only cut taxes in a way that was responsible and I certainly wouldn’t do anything that fuelled inflation just when we are starting to have some success in bringing down inflation,” Hunt told Sky News on Thursday, on a day that new data showed Britain had slipped into a technical recession at the end of 2023.
Hunt received the Office for Budget Responsibility’s second pre-Budget forecast on Wednesday, and officials briefed on its contents said things had “gone backwards” since the first forecast on January 30.
One Treasury insider said the “fiscal headroom” available to Hunt in the latest forecast was little more than the £13bn he had left in reserve after the Autumn Statement in November.
Fiscal headroom is the margin Hunt has against his rule of cutting public debt year-on-year as a share of GDP in five years’ time.
The chancellor could still cut national insurance or income tax rates by 1p and fund other projects, such as a “Brit Isa” intended to boost investment in UK companies. But he would be running close to the fiscal wire.
The benchmark 10-year gilt yield has risen to 4 per cent from 3.6 per cent at the start of the year, though it is still lower than a level of 4.5 per cent used by the OBR for their projections for debt interest in November.
Investors say the outlook for the chancellor regarding gilt yields may brighten, but time is running out for meaningful changes ahead of the Budget that might give Hunt a last-minute fiscal boost.
“We do expect yields to fall much further through the course of the year but that may not happen until the spring and beyond,” said Daniela Russell, head of UK rates strategy at HSBC.
Rachel Reeves, shadow chancellor, on Thursday declined to say whether Labour would vote for any tax cuts contained in the March 6 package.
Reeves has previously accused Hunt of adopting a “scorched earth” policy, cutting taxes and starving public services of cash. But Labour insiders admit the party would probably vote for tax cuts.
“That depends on the state of the public finances and projections by the OBR,” Reeves told a press conference. She said she would not commit to tax cuts unless she could say “where the money is coming from”.
