Jeremy Hunt is expected to announce tax cuts in Wednesday’s budget in an attempt to revive the government’s lackluster performance in opinion polls as the country sinks into recession amid a cost-of-living crisis.
The chancellor faces pressure from within the Conservative Party to take bold action, although he warned that any measures would be too risky with inflation still above the 2% target and government debt at its highest level since the 1960s. Need to be “cautious and responsible”. Here are five key charts that will back up his claim.
Inflation plummets
UK inflation has fallen more than expected since the Office for Budget Responsibility (OBR) published its economic and public finance forecasts in the Chancellor’s Autumn Statement.
Headline interest rates have fallen to 4% from more than 10% a year ago, allowing Rishi Sunak to meet his target of halving inflation.
The Bank of England expects economic growth to fall further below 2% this spring as global energy prices cool and food and drink price growth slows. However, slower inflation does not mean lower prices, just slower price increases.
Financial markets expect the central bank to cut interest rates starting as early as the summer. But the central bank warned that a tight job market, strong wage growth and higher prices in services could push inflation back above target later this year.
Economic growth is weak
The UK economy fell into recession at the end of 2023 as households cut back on spending. Official data showed GDP fell 0.3% in the fourth quarter, following a 0.1% decline in the third quarter. Economists consider two consecutive quarters of declines to be a recession.
In November, the OBR’s latest forecast showed that the economy would narrowly avoid recession in late 2023 before rebounding in 2024, with growth of 0.7%. At that time, economic growth was expected to rebound to 1.4% in 2025 and 2% in 2026 and 2027.
The OBR will update its forecasts on Wednesday. Official forecasts that Britain’s population will grow larger than previously expected could boost gross domestic product in the longer term, with lower inflation and interest rates likely to provide a boost.
However, growth is expected to weaken in the short term. Consulting firm Capital Economics expects the OBR to cut its GDP forecast to zero growth in 2024 and to 1.3% in 2025.
fiscal space
Hunt has a self-imposed “fiscal rule” that requires government debt to fall as a percentage of GDP in the fifth year of forecasts compiled by the OBR. In the Autumn Statement, he set aside around £13bn to meet this rule, often described as the chancellor’s “headroom” to achieve this.
In November, the OBR forecast government debt at 89% of GDP in 2023-24, rising to 93.2% in 2027-28 before falling slightly to 92.8% in the fifth and final year.
It is understood that forecasts submitted to Hunt by the OBR showed around £13bn of headroom before any tax and spending decisions were made in the budget, limiting his room for maneuver.
Tax cuts?
Hunt said he would announce “permanent tax cuts”. It is expected that this could lead to cuts to National Insurance, while fuel duty could also be frozen. However, Wednesday’s measures are unlikely to fully offset other measures that have pushed up overall tax levels.
The biggest of these so far is a six-year freeze on income tax thresholds, which the Institute for Fiscal Studies thinktank estimates will raise £44bn, of which £29bn will be imposed by April 2025.
Overall taxation levels (as a share of gross domestic product) are expected to reach their highest sustained levels since World War II.
austerity
Hunt’s tax cuts in his autumn statement will be funded almost entirely by real money from plans to cut public spending by £20bn from 2025. Reports suggest the chancellor may impose tighter restrictions on the public sector on Wednesday in a bid to find more money for tax cuts.
Under current plans, the Resolution Foundation estimates that protected government sectors – including the NHS, education, defense and overseas aid – will see modest real increases in per capita funding.
However, further restrictions on the public sector will mean that the unprotected sector – including local government and prisons – faces steep declines, with a per capita value of around £30bn.
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