British Chancellor of the Exchequer Jeremy Hunt said earlier this month that Britain will not enter a recession this year.
Hannah McKay | Reuters
LONDON — Economists expect British Chancellor of the Exchequer Jeremy Hunt to use a small fiscal windfall during his spring budget on Wednesday to implement a modest package of tax cuts.
Heading into what is likely to be the Conservative government's final budget event before the country's upcoming general election, Hunt is under pressure to sweeten the deal for voters as his party trails the main opposition party by more than 20 points in all national polls Labour.
But he must also deal with the constraints of fragile public finances and a stagnant economy that recently entered a modest technical recession.
On the positive side, inflation has fallen faster than expected and market expectations for interest rates are well below where they were in Hunt's November Autumn Statement.
“On balance, we think Chancellor Hunt's fiscal space is likely to have increased – but only marginally, and nowhere near what he had in the autumn statement (largely due to the fall in expected debt costs),” said Sanjay Raja , senior economist at Deutsche Bank. in a research note Thursday.
The German lender estimates that the government's fiscal space will have grown from around £13 billion ($16.46 billion) to around £18.5 billion, and that tax cuts will “very likely” be the first thing we do. Raja suggested that the finance minister will err on the side of caution in easing fiscal policy, preferring supply-side support over boosting demand.
“Supply-side measures are more likely in our view, especially as the Bank of England becomes more willing to ease monetary policy,” Raja said.
“Therefore, tax cuts on National Insurance contributions (NICs) and changes to child benefit are more likely to occur in the Spring Budget (contrary to previous expectations of income tax cuts).”
A substantial cut to national insurance was the highlight of Hunt's Autumn Statement, although economists were quick to point out that any benefit to payers would be more than offset by the effect of existing freezes on personal tax thresholds – known as the 'fiscal drag'. “
Britain's National Insurance is a tax on employee income and employer profits to pay for social security benefits, including the state pension.
Raja also suggested that an extension of the government's existing fuel duty freeze remains possible, and that some cuts are likely to be used to partially offset an easing of fiscal policy.
Overall, Deutsche Bank expects Hunt to deliver a net easing of £15 billion in the next financial year, falling to around £12.5 billion over the medium term.
“The outlook for public finances remains precarious. Small changes in the macroeconomic outlook could lead to major shifts in public finances. The Chancellor continues to walk a fine line between managing his fiscal rules now and ramping up austerity later,” said Raja.
“Certainly, big questions remain about public finances – including whether cuts, or limited increases in some areas, remain realistic to tackle increasing pressure on public services, and the government's own ambitions in the areas of net zero emissions, defense and foreign affairs. development expenditure.”
Economists at BNP Paribas expect a more modest package of tax cuts worth around £10 billion for the 2024/2025 financial year, and predict the government will start the year with a fiscal windfall of around £11 billion.
The French bank agreed that the cuts will be aimed at boosting labor supply, with “little impact on inflation and therefore on the Bank of England.”
“Our base case is that the government will spend £10 billion of the fiscal windfall in the short term and use the extra fiscal space to cut personal taxes in the medium term,” economists Matthew Swannell and Dani Stoilova said in a research note with the title 'last chance saloon'. .”
They also expect the Treasury to defer fuel duty increases by a further 12 months in March 2024, at a cost of £3.7 billion a year, and make a permanent 1p cut in the basic rate of income tax at a cost of between £3.7 billion per year. 6 billion and £7.35 billion per year.
“The overall effect of this policy package would be to return fiscal space to approximately the level at which it started, i.e. GBP 12.7 billion, over the medium term,” she added.
“With the Conservative party trailing in the polls and the Budget potentially being the last chance to ease fiscal policy before the general election, we expect Chancellor Hunt to at least once again spend all available fiscal space.”