Advertisement

Hunt handed extra £10bn for pre-election tax cuts

Jeremy Hunt
The Chancellor has received a boost from lower gilt yields and predicted interest rate cuts - Chris Ratcliffe/Bloomberg

Jeremy Hunt has enough headroom to cut taxes by at least another £10bn before the next election as borrowing costs fall.

Economists have said the Chancellor has been boosted by lower gilt yields and a hope that the Bank of England will start cutting interest rates by next summer.

That has fuelled predictions that Mr Hunt will have the option to cut income tax by a penny during his Spring Budget, driven by less being spent on Britain’s huge debt interest bill.

UK benchmark 10-year gilt yields fell below 4pc last week and have declined by roughly half a percent since Mr Hunt delivered his Autumn Statement in November.

Investors are also betting that interest rates set by Threadneedle Street will be closer to 3.5pc in five years, instead of 4pc.

Goldman Sachs said on Sunday that it expected Governor Andrew Bailey to announce the Bank’s first rate cut in August, with further reductions expected at every policy meeting until the middle of 2025.

Capital Economics said the falls would help to reduce Britain’s debt interest bill and increase the likelihood that Mr Hunt will meet his goal of falling debt by the end of the decade.

Ruth Gregory at Capital Economics, a former economist at the Office for Budget Responsibility (OBR), said: “Taken together, this might be expected to reduce borrowing by around £12bn by 2028-29. Public sector current receipts are about £1.2bn lower, but debt interest spending is reduced by about £13.8bn.

“Assuming the moves are sustained and all else is equal, we estimate the headroom could rise from £13bn against the Chancellor’s main fiscal rule to about £24.5bn, an increase of £11.5bn.”

Ms Gregory said Mr Hunt could afford to cut taxes by more than £10bn while maintaining some headroom. Cutting income tax by a penny would cost roughly £7bn a year while abolishing inheritance tax would cost about £8.4bn.

The Chancellor is also expected to cancel the 5p rise in fuel duty due next April, which will cost about £6bn a year.

Capital Economics believes the Treasury could enjoy an even bigger windfall in the March Budget if January pay deals are larger than expected.

Mr Gregory added: “If we are right, this would be consistent with an even bigger buffer of about £35bn against the Chancellor’s main fiscal rule.”

Higher inflation has forced workers to hand more of their pay rises to the taxman amid a six-year freeze in income tax thresholds, which has dragged people into higher tax bands.

The new forecasts come as the Bank of England prepares to keep interest rates at their current level of 5.25pc this week in the final meeting of the Monetary Policy Committee (MPC) this year.

Traders have also started betting on interest rate cuts by the European Central Bank (ECB) as the economic outlook across the continent darkens.

Official figures this week are expected to show the UK economy shrank in October, although the country is expected to narrowly avoid falling into recession at the turn of the year.

Despite the gloomier economic backdrop, the Confederation of British Industry (CBI) predicted interest rates were likely to remain at their current levels until at least 2026 to return inflation back to the Bank’s 2pc target, which will weigh on growth and push up unemployment.

Policymakers at the Bank are likely to use this week’s meeting to push back against predictions of rate cuts given UK inflation remained at 4.6pc in October – more than double the country’s target.

Despite the Bank’s message, Andrew Goodwin, chief UK economist at Oxford Economics, said there would be pressure on the Chancellor to cut taxes further ahead of next year’s election.

Mr Goodwin also believes lower gilt yields and bets on rate cuts before the end of next year will hand Mr Hunt around £9bn more to cut taxes in the spring if nothing else changes.

He said the Chancellor was already preparing the ground for pre-election tax cuts: “Mr Hunt’s big problem is that any tax rises he announces in the Budget will have to either have an impact very quickly or be sufficiently eye-catching that voters give him credit even though they haven’t seen the impact in their pockets.

“This will probably steer him towards income tax.”

Ms Gregory agreed that Mr Hunt and Rishi Sunak were likely to favour “headline-grabbing measures that voters feel the benefits of quickly to help prime the polls”.

Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month, then enjoy 1 year for just $9 with our US-exclusive offer.