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Jeremy Hunt, Britain’s chancellor, is struggling to escape a fiscal “headlock” imposed by his official forecasters as he tries to find space for tax cuts and lift pre-Budget gloom among Conservative MPs.
Hunt will prioritise personal tax cuts on March 6, but his allies say his room for manoeuvre is limited because of increasingly tight fiscal forecasts produced by the spending watchdog, the Office for Budget Responsibility.
Tory MPs still hope Hunt can spring a surprise by cutting national insurance rates by 2p at a cost of about £10bn, although the chancellor’s aides have insisted this was “impossible at the moment, let alone difficult”.
To try to find cash to fund tax cuts Hunt is looking at targeted tax rises, including on vapes and tobacco, while he hopes to unlock future savings by setting out plans to raise public sector productivity.
Expectation management is an integral part of the pre-Budget ritual, but one Downing Street official claimed it had been “agony” in the past few weeks as policies were ditched because of deteriorating forecasts.
Ideas such as changing tax rules to help middle earners keep more of their child benefit or a cut to stamp duty on share transactions — intended to boost equity markets — have been dropped, according to those close to the Budget process.
A mood of weary acceptance has settled on many Tory MPs that the big tax cuts they hoped might change their party’s pre-election political fortunes are unlikely to materialise.
“It’s almost as if there isn’t a Budget happening at all,” said one senior Tory MP, describing the flat mood at Westminster. Another said: “He will have something, but it won’t be what we hoped for. The OBR has him in a headlock.”
Sir Charles Walker, a Tory grandee, said many MPs would settle for sound economic governance. “I want a government that is fiscally responsible, first and foremost,” he said. “That’s why I’m a Conservative.”
Hunt warned moderate Tory MPs from the One Nation group to temper their expectations of big tax cuts at a private meeting on Monday. “He said there wasn’t a shed load of money,” said one attendee.
Having set expectations at a very low level, Hunt will hope to surprise on the upside on March 6, even if his team claims that the raw arithmetic is grim.
His officials insist the latest OBR forecasts only give Hunt about £13bn of headroom against his self-imposed fiscal rule, which commits to cutting debt as a share of gross domestic product between the fourth and fifth year of the forecast.
Government insiders say the chancellor would be willing to eat into that headroom and cut it to the £6.5bn he had left over after the spring Budget in 2023. That was the smallest buffer since the OBR was created in 2010.
“We’ve got £7bn to play with,” claimed one government insider. However, this could yet change; the OBR is due to present its latest forecasts on Wednesday, followed by a final round on Friday.
A 1p drop in national insurance, seen by Tory MPs as a bare minimum when it comes to tax cuts, would cost about £5bn. A 1p cut in the basic rate of income tax would cost about £7bn.
A national insurance cut would benefit workers and would thus be presented as a “pro-growth measure”; Hunt cut national insurance by 2p in his Autumn Statement and another cut now would be presented as “Part II” of a co-ordinated package.
To create more space, Hunt will announce a “vape products levy” to be paid on imports and by manufacturers. The levy, first reported by The Times, plus higher tobacco duty could raise more than £500mn by 2028/29.
Hunt is also expected to set out proposals to raise productivity in public services. He and Prime Minister Rishi Sunak are enthusiastic advocates of the use of artificial intelligence.
The chancellor is still considering whether to cut the government’s assumptions for public spending levels after 2025, a move which might release £5bn-£6bn for tax cuts now.
A plan to raise productivity may give him some cover for such cuts, although Hunt’s allies say he would prefer not to cut spending plans, knowing he would be accused of piling more austerity on the country.
His spending plans are already deemed unrealistically tight by economists and the OBR’s head Richard Hughes described them as beyond “fiction”, because the government had not said how they could be achieved.
Earlier this year falling borrowing costs on government debt helped stoke hopes that the fiscal headroom would swell in time for the March 6 budget, permitting the chancellor to offer chunky pre-election giveaways.
Since then, however, the fiscal wriggle room has shrunk, in part because of a lower outlook for government revenue given the prospect of lower inflation.
The Treasury said: “The chancellor will be looking to do the right thing for long-term growth.”
A spokesperson added that higher productivity was an answer to improving growth and the public sector finances.
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