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Chancellor Jeremy Hunt has downplayed the prospects for UK tax cuts in his March Budget ahead of key forecasts by the Bank of England on the state of the economy on Thursday.
Having talked up the likelihood of pre-election tax cuts in January, Hunt is now trying to reset expectations after the Treasury’s own internal forecasts suggested he would have little room for manoeuvre.
However, fiscal forecasts could move sharply between now and Budget day on March 6 and will be affected by changes to market sentiment on future interest rate movements, potentially giving Hunt more scope for tax cuts.
The BoE is likely to acknowledge on Thursday that it is seeing unexpectedly rapid progress in getting inflation down, analysts said, but the central bank is not expected to begin cutting interest rates yet.
The BoE’s Monetary Policy Committee is widely anticipated to hold rates at 5.25 per cent for a fourth straight month at its first meeting of 2024, after an aggressive campaign of 14 rate rises aimed at quashing inflation.
The rate decision will be accompanied by new forecasts — which will be keenly awaited by the Treasury and markets — that are expected to show sharp declines in UK inflation in the coming months.
Hunt told the BBC’s Political Thinking podcast he was awaiting the “final numbers” from the independent Office for Budget Responsibility, which produces several updated fiscal forecasts before the Budget.
The Treasury’s own internal forecasts last week suggested Hunt might have just £14bn of “headroom” against his own borrowing targets, which commit to cutting debt as a share of GDP in five years’ time.
The first OBR forecasts arrived this week, with government insiders saying they “broadly” reflected the Treasury’s analysis. However, Hunt has a clear interest in depressing expectations for tax cuts in the hope he can surprise voters — and Tory MPs — on March 6.
“It doesn’t look to me like we will have the same scope for cutting taxes in the spring Budget that we had in the Autumn Statement,” Hunt said.
“And so I need to set people’s expectations about the scale of what I’m doing because people need to know that when a Conservative government cuts taxes we will do so in a responsible and sensible way.”
He added: “But we also want to be clear that the direction of travel we want to go in is to lighten the tax burden.”
The IMF warned Hunt this week against cutting taxes, arguing the country needs to curb public borrowing and prioritise spending in areas such as health, education and tackling climate change.
Pierre-Olivier Gourinchas, IMF chief economist, told the Financial Times the UK’s focus should be on “the path towards a fiscal consolidation”.
Hunt said he agreed with the IMF that “untargeted tax cuts that are just crowd-pleasers” were not a good idea. “But if they are strategic, smart tax cuts then that is a very important part of the strategy to grow the economy,” he added.
In his Autumn Statement Hunt cut taxes by about £20bn — roughly split between cutting national insurance contributions from 12p to 10p and a permanent tax break for business.