Chancellor to perform balancing act at Spring Budget
The Spring Budget is less than two months away and Chancellor Jeremy Hunt must now perform a balancing act. He will aim to boost economic growth, bring down inflation and reduce the national debt. Mr Hunt is still trying to restore confidence in the government after the travails of last year, and there are still many in the Conservative Party that want to see tax cuts prioritised. How will the Chancellor plot a path forward?
Tax cuts look unlikely in the short term though as the Chancellor has signalled he will stick to his deficit reduction plan.
The scale of this challenge was underlined by December’s public sector net borrowing figures. The deficit came in at over £27 billion for the month, £9.8 billion more than the Office for Budget Responsibility (OBR) predicted at the time of November’s autumn statement.
Interest payments on the national debt during the month came in at £17.3 billion, the second highest on record, reflecting the fact that interest payments on around a quarter of the national debt are linked to the rate of inflation.
Another key element of public spending was the government’s support of households and businesses with their energy bills, which cost around £7 billion. However, this sum is due to come down partly because global gas prices have been falling and partly because the government’s energy support packages are due to become less generous from April onwards.
Tax receipts were higher in December than a year earlier, while the cumulative deficit for the first eight months of the 2022/23 financial year have been revised down.
HMRC said December’s record tax haul was partly due to the introduction of the Energy Profits Levy – although the sum collected is also due to drop in future in line with falling gas prices.
VAT, corporation tax and PAYE were all up significantly, the latter partly due to private sector pay rises and partly because of the Chancellor’s decision not to raise income tax thresholds in line with inflation.
Inflation and interest rates
Some good news for the Chancellor is that inflation looks to have peaked in October last year and is now set to fall steadily. Economists at Barclays are forecasting that the headline rate of Consumer Prices Inflation (CPI) will have fallen to 6.3% by July this year and, by December this year, will be down to 3.9%.
In addition, the financial markets are signalling a lower path for interest rates than in the aftermath of Kwasi Kwarteng’s Mini Budget last September.
However, the Institute for Fiscal Studies (IFS) says the benefits of smaller debt interest payments will not be felt until 2024/25. It is unlikely the Chancellor will feel he has enough headroom to announce tax cuts at the Spring Budget, despite pressure from some elements of his party.
Any wiggle room the Chancellor gets from the better numbers on inflation and the deficit is likely to be limited.
Businesses will continue to demand support with energy bills while public sector pay demands continue. These are likely to see some kind of compromise reached before the strikes become too damaging to all concerned.
Business groups are also calling for pro-growth measures in the Budget, but his predecessor’s errors limit the Chancellor’s options here.
Mr Hunt is likely to keep the fuel duty freeze in place for a further 12 months, a giveaway that would cost the Treasury £6 billion. All these factors limit the Chancellor’s room for manoeuvre on 15 March.
The Chancellor will deliver the Spring Budget, alongside a forecast from the independent OBR, on 15 March.
Mercia’s tax experts will be watching and will provide detailed analysis of the day’s announcements. Keep your clients up to date with our Budget products.