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British Chancellor Jeremy Hunt’s hopes of delivering big tax cuts before the election suffered a setback after the Treasury published internal forecasts suggesting he would have limited room to make gifts.
The Treasury’s internal analysis says Hunt will have a fiscal headroom – the buffer against its own borrowing rules – of £14bn, barely more than the £13bn he put in side in its fall statement in November.
The Treasury estimate is considerably lower than the margin predicted by independent analysts and may be seen by some as an attempt to manage expectations about the scale of tax cuts ahead of the March 6 budget.
Estimates will not be finalized by the Office of Budget Responsibility until the end of the budget process.
The Treasury said: “Although we have doubled our headroom since March (2023), from £6.5 billion to £13 billion, it remains low by historical standards and may be wiped out by the changing economic conditions. »
The margin size is highly volatile given the impact of changes in rate expectations as well as changes in economic variables, including inflation. A change of just one percentage point in interest rates and inflation could cost £29.6bn by the end of the forecast, more than wiping out the headroom, according to the Treasury current.
Market analysts are more optimistic about the likely size of the margin: Capital Economics, for example, predicted that Hunt would have a margin of £19 billion, while Bloomberg Economics predicts a margin of between £17 billion and £25 billion. of pounds sterling.
The Treasury’s analysis, confirmed by government sources, comes ahead of the OBR’s first pre-budget budget forecasts next week, which will form the basis of Hunt’s decisions on tax and spending.
The OBR will produce several updated forecasts between now and the Budget, and Treasury insiders have confirmed that the headroom available to Hunt could continue to swing significantly in either direction.
Fiscal headroom represents the OBR’s assessment of how much room Hunt will have in relation to his self-imposed target of reducing debt as a proportion of gross domestic product in five years’ time.
The chancellor is expected to use a considerable part of the room for maneuver given to him by the OBR to finance tax cuts. Hunt and Rishi Sunak, the Prime Minister, have raised the possibility of such cuts in recent days.
Richard Hughes, chairman of the OBR, said this week that the £13 billion estimate in November was a “minimal” amount, given the huge uncertainty surrounding such analysis and incoming borrowing data .
“That’s why we must stick to our plan to reduce debt by growing the economy and being responsible in our spending,” Treasury said.