Attention is focused on the upcoming Spring Budget this Wednesday. Jeremy Hunt aims to attract voters with tax reductions in anticipation of a general election later this year or early next year.
Reports suggest a possible 2p reduction in national insurance and a continued 5p freeze on fuel duty. These measures could initially cost the Treasury around £15 billion annually, decreasing to £12.5 billion in the medium term, according to Deutsche Bank analysts.
There are questions regarding Hunt’s fiscal leeway before the budget and his desired leftover post-budget.
The Office for Budget Responsibility’s November forecast suggested Hunt had a £13 billion margin to comply with fiscal rules, which require government net debt to decrease in the last year of five-year forecasts. Economists have revised this projection to £18 billion, though it was higher before recent changes in inflation and interest rate forecasts.
Berenberg estimates that Hunt’s fiscal space might reach up to £25 billion, but to maintain credibility, he would need to conserve some.
The focus on the Spring Budget hinges on three factors, as per Deutsche Bank: the extent of fiscal easing, the sustainability of the Chancellor’s medium-term fiscal plans, and the remaining fiscal room for potential events later in the year.
The key concern lies in the gilt remit, with Deutsche Bank anticipating sales of around £271 billion, in contrast to the consensus of about £260 billion.
Hunt’s strategy for financing his desired tax cuts, which he hopes will be decisive in the election, will depend on where he can trim public spending.
Deutsche Bank expects only minor cuts in departmental operational and capital spending, cautioning that more significant reductions might raise concerns about the sustainability of current public finance projections.
