LONDON — U.K. Chancellor Jeremy Hunt will have £31 billion more headroom than he thought in his budget — but the tax cuts his MPs crave are still a long way off, analysts have warned.
The Institute for Fiscal Studies, a leading economic think tank, said the U.K. economy has been “more resilient” than fiscal watchdog the Office for Budget Responsibility projected in November, with a “much shallower recession” now expected in 2023.
But there is still “huge uncertainty” around the “murky” medium-term outlook — and OBR growth forecasts for future years could be revised down, the IFS warned.
Hunt, who will deliver the U.K.’s first full budget for 17 months on March 15, faces intense calls from Conservative MPs to announce tax cuts to boost growth — and his party’s flagging poll ratings — after borrowing less than expected in the short term.
The IFS said lower borrowing was largely driven by lower-than-expected energy costs, which in turn reduced government subsidies by £11 billion.
Yet IFS director Paul Johnson said he would be “very surprised” if the U.K.’s tax burden — at a postwar high — comes down persistently “in my lifetime.”
Johnson said the so-called “peace dividend” may be over, with pressure now on to raise defense and health spending at the same time. This means Britain may need a “very serious national discussion about whether that means more miserable public services than we would like, or higher taxes,” he added.
Speaking to POLITICO, Johnson and a senior business leader said Hunt could extend the government’s current energy price guarantee — a £2,500-a-year cap on average household bills — by three months, instead of raising it to £3,000 on April 1.
This would smooth out households’ energy bills until July, when the analysts Cornwall Insight project they will fall to £2,112-a-year as wholesale costs come down.
Johnson said such an extension — which would cost £2.7 billion — would be “relatively cheap and politically popular,” and he “wouldn’t be surprised” if it happens.
The senior business leader said they would not be surprised at an extension, as it would maintain consumer confidence and help to lower inflation.
However, a Treasury official downplayed expectations of an extension. They pointed to Hunt’s comments on February 10 that while support would be kept “under review,” he had to be “responsible with public finances.”
The official added that other support begins from April — a 9.7 percent minimum wage rise, 10.1 percent rise in benefits and pensions, and new cost of living payments.
The IFS said the Treasury “will almost certainly” have to offer more money to unlock a host of disputes over pay. Private sector wages are set to rise 5.4 percent in 2023/24, more than the 3.5 percent the Treasury says is affordable for the public sector. Closing that gap would cost another £5 billion.
Freezing fuel duty — which would bake in a 5p-a-liter temporary cut announced last year — would cost a further £6 billion.
But Johnson said while investment allowances could be made more generous, he will be “very surprised” if April’s corporation tax rise is cancelled.
