UK Finance Minister Jeremy Hunt said earlier this month that the UK would not fall into recession this year.
Hannah McKay | Reuters
LONDON – Economists expect British Finance Minister Jeremy Hunt to use a small fiscal windfall to implement modest tax cuts in Wednesday’s spring budget.
The upcoming general election is likely to be the Conservative government’s last fiscal campaign, and Hunt is under pressure to sweeten the deal with voters as his party trails the main opposition Labor Party by more than 20 points in all national opinion polls.
But he also must contend with the constraints of fragile public finances and a stagnant economy that recently entered a mild technical recession.
On the bright side, inflation is falling faster than expected and market expectations for interest rates are well below expectations in Hunter’s November autumn statement.
Sanjay Raja, senior economist at Deutsche Bank, said: “Overall, we think Chancellor Hunt’s fiscal space is likely to increase, but only to a limited extent and nowhere near the levels seen in his autumn statement. (largely due to expected lower debt costs).” in a research note on Thursday.
The German bank estimates that the government’s fiscal space will increase from about 13 billion pounds ($16.46 billion) to about 18.5 billion pounds, with tax cuts “likely” to be the first measure. Raja said the finance minister would be too cautious in easing fiscal policy and tend to support the supply side rather than boost demand.
“We think supply-side measures are more likely, especially if the Bank of England is more willing to ease monetary policy,” Raja said.
“Therefore, cuts to National Insurance Contributions (NICs) and changes to child benefit are more likely to appear in the spring budget (contrary to previous expectations of income tax cuts).”
The highlight of Hunt’s autumn statement will be deep cuts to national insurance, although economists were quick to point out that the impact of the existing freeze on personal income tax thresholds – the so-called “fiscal drag” – will be more than offset by the impact on payers. benefit. “
British National Insurance is a tax on workers’ earnings and employers’ profits to pay for state social security benefits, including state pensions.
Raja also said the government is still likely to extend the existing fuel tax freeze, and some spending cuts may partially offset the easing of fiscal policy.
Overall, Deutsche Bank expects Hunter to achieve net easing of 15 billion pounds in the next financial year, falling to around 12.5 billion pounds in the medium term.
“The outlook for public finances remains unstable. Small changes in the macroeconomic outlook could lead to major shifts in public finances,” Raja said. “The chancellor continues to walk a delicate balance between managing fiscal rules now and intensifying austerity later.”
“To be sure, major questions remain over public finances, including whether spending cuts or limited growth in some areas remains realistic to cope with increasing pressures on public services, and the government’s own efforts to address net zero emissions, defense and overseas ambitious development spending.”
Economists at BNP Paribas expect a more modest tax cut plan worth about 10 billion pounds to be implemented in the 2024/25 financial year, and expect the government to receive a fiscal surprise of about 11 billion pounds at the beginning of the year.
The Bank of France unanimously believes that the purpose of cutting interest rates is to stimulate labor supply and “will have little impact on inflation and even the Bank of England.”
“Our base case is that the government will Spend £10 billion of the near-term fiscal windfall and use the additional medium-term fiscal space to cut personal taxes.”
They also expect the Treasury to delay a planned increase in fuel duty in March 2024 for a further 12 months at a cost of £3.7bn a year, and permanently cut the basic rate of income tax by 1p at a cost of £6bn and £7.35bn a year.
They added: “The overall effect of this policy plan will be to bring medium-term fiscal space broadly back to the original £12.7bn.”
“With the Conservatives trailing in the polls and the Budget likely to be the last chance to ease fiscal policy before the election, we expect Chancellor Hunt to at least once again use any additional fiscal space available.”
