UK Chancellor Jeremy Hunt said earlier this month that the UK will not enter a recession this year.
Hannah Mackay | Reuters
LONDON – Economists expect British Exchequer Secretary Jeremy Hunt to use small fiscal gains to push through a modest package of tax cuts in his spring budget on Wednesday.
Ahead of what is likely to be the Conservative government’s final fiscal exercise before the country’s upcoming general election, Hunt is being forced to offer voters a sweetener as his party trails main opposition Labor by more than 20 points in all national polls.
But it will also have to overcome the constraints of fragile public finances and a stagnant economy that recently entered a mild technical recession.
On the other hand, inflation was falling faster than expected, and market expectations for interest rates were significantly lower than those indicated in Hunt’s fall statement in November.
Over the weekend, the Treasury announced plans in advance to provide up to £1.8 billion ($2.3 billion) in benefits by boosting public sector productivity, including freeing up police time for more frontline work.
The Independent Office for Budget Responsibility estimates that returning to pre-pandemic productivity levels could save the Treasury up to £20 billion a year.
Hunt will also announce £360 million in funding for research and development (R&D) and manufacturing projects in the life sciences, automotive and aerospace sectors, the Treasury said on Monday.
However, Wednesday’s announcement left serious questions about the tax cuts.
Increase in financial reserve
“Overall we think Chancellor Hunt’s fiscal headroom is likely to increase – but only marginally and nowhere near what he had in the autumn statement (largely due to a fall in expected debt costs),” said a senior economist at Deutsche Bank Sanjay Raja. in a research note Thursday.
The German lender estimates the government’s fiscal space will rise from around £13 billion to around £18.5 billion and that tax cuts are “very likely” to be the first port of call. Raja suggested that the finance minister would err on the side of caution in easing fiscal policy, favoring support for supply rather than stimulating demand.
“In our view, supply-side measures are more likely, especially given that the Bank of England is more willing to ease monetary policy,” Raja said.
“So cuts to National Insurance Contribution (NIC) taxes and changes to child benefit are likely to be included in the spring Budget (as opposed to earlier expectations of income tax cuts).”
Significant cuts to National Insurance were the highlight of Hunt’s autumn announcement, although economists were quick to point out that its benefit to ratepayers would be more than offset by the effect of the existing freeze on personal income tax thresholds, known as the “fiscal drag”. “
UK National Insurance is a tax on employee income and employer profits used to pay government social security benefits, including the State Pension.
Raja also suggested that an extension of the government’s existing moratorium on fuel duty remains possible, and that some spending cuts are likely to be used to partially offset the easing of fiscal policy.
In total, Deutsche Bank expects Hunt to provide £15 billion of net easing in the next financial year, falling to around £12.5 billion over the medium term.
“The outlook for government finances remains uncertain. Small changes in the macroeconomic outlook can lead to large changes in public finances. The Chancellor continues to walk a tightrope between managing his fiscal rules now and increasing austerity in the future,” Raja said.
“Of course, big questions remain over public finances, including whether spending cuts or limited growth in some areas are still realistic to address the growing pressure on public services, as well as the government’s own ambitions for net zero, defense and overseas. development expenses.”
Economists at BNP Paribas expect a more modest package of tax cuts of around £10 billion in the 2024/25 financial year and predict the government will start the year with a fiscal windfall of around £11 billion.
The French bank agreed that the cuts would be aimed at stimulating labor supply with “little impact on inflation and therefore on the Bank of England”.
“Our base case scenario is that the government spends £10 billion of the short-term fiscal windfall and uses the additional medium-term fiscal space to cut personal taxes,” economists Matthew Swannell and Dani Stoilova said in a research note entitled “Last Chance Salon.” ” “
They also expect the Treasury to delay the March 2024 fuel duty rise for a further 12 months at a cost of £3.7bn a year and introduce a permanent 1p cut in the basic rate of income tax at a cost of between £6bn and £7.35bn sterling per year.
“The overall effect of this policy package will be to leave the medium-term fiscal headroom roughly where it was at £12.7 billion,” they added.
“With the Conservative Party trailing in the opinion polls and the Budget possibly being the last opportunity to loosen fiscal policy before the general election, we expect Chancellor Hunt to at least spend any additional fiscal space available to him again.”