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Fiscal Flexibility and Tax Cut Prospects: UK Finance Minister Gains Leverage Ahead of Budget Announcement

British Finance Minister Jeremy Hunt has received a positive development in his pursuit of potential tax cuts before an anticipated national election later this year. New data reveals that he has more fiscal flexibility in his March budget plan than initially anticipated. The Office for National Statistics reported on Tuesday that the UK posted a smaller-than-expected budget deficit of £7.77 billion ($9.9 billion) in December, marking less than half the figure from the previous year.

Economists surveyed by Reuters had projected public sector net borrowing, excluding state-owned banks, to reach £14 billion, aligning with the estimate from the government’s budget watchdog. However, the actual deficit came in significantly lower, providing the government with more room to maneuver in terms of budget planning. The government’s debt interest bill for December was the lowest since 2020, reflecting the decline in inflation.

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In the first nine months of the financial year, borrowing totaled £119.1 billion. While this represents an £11.1 billion increase from the same period a year earlier, it is nearly £5 billion less than the budget watchdog’s forecast. The Office for National Statistics attributed this favorable year-to-date figure to a £5 billion upward revision of corporation tax receipts.

Both Finance Minister Jeremy Hunt and Prime Minister Rishi Sunak have expressed their intent to further reduce taxes. With an eye on a March 6 government budget announcement, many investors anticipate measures aimed at appealing to voters in the lead-up to the expected national election later this year. The United Kingdom is currently on track to experience the highest tax burden, measured as taxes as a share of gross domestic product, since World War II, generating discontent within the ruling Conservative Party.

In November, Jeremy Hunt’s budget update suggested a narrow margin of £13 billion for potential tax cuts or spending increases while staying on course to meet the target of reducing the public debt burden. However, since November, financial markets’ expectations for future interest rates have significantly decreased, providing Hunt with additional budgetary leeway.

Economist Ruth Gregory of Capital Economics suggests that Hunt may now have around £20 billion in fiscal headroom for his March budget. This could allow for measures like freezing fuel duty in April 2024 (costing approximately £6.0 billion annually) and potentially announcing crowd-pleasing initiatives such as a 1p cut to income tax (costing £6.9 billion annually), all while maintaining a fiscally prudent stance.

Samuel Tombs at Pantheon Macroeconomics suggests that Hunt may proceed cautiously to avoid limiting the Bank of England’s ability to cut interest rates, given the economic landscape. The Conservative Party is also cautious about actions that might lead to an increase in mortgage rates.

British borrowing has witnessed a significant surge in recent years, initially to support the economy during the COVID-19 pandemic and later to provide substantial aid to households and businesses grappling with the surge in energy prices in 2022. As of the latest data, public sector net debt (excluding state-owned banks) stands at £2.69 trillion, equivalent to 97.7% of economic output. Jeremy Hunt has set a fiscal rule to ensure that debt is on track to decrease as a share of GDP over the next five years.

Tags: BritishFiscalTax

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