How do the latest borrowing figures impact Hunt’s tax cut calculations?
With the Autumn Statement still fresh in the memory, talk has already turned to next year’s Spring Budget, and the likelihood of tax cuts, following this morning’s borrowing figures.
Official figures showed that the Treasury borrowed £14.3bn in November, which was nearly £1bn less than this time last year.
The same trend which has been repeating itself all year played out again: While the government was forced to shell out more to service its debt and meet benefit payments, this was more than offset by higher tax receipts.
Hunt’s decision to freeze tax bands has dragged more taxpayers into higher tax brackets, a stealth tax known as fiscal drag.
Thanks in part to fiscal drag, the Organisation for Economic Co-operation and Development (OECD) has estimated the total tax-to-GDP ratio across the UK hit 35.3 per cent for the 2022/23 financial year – the highest since OECD records began in 2000.
Despite a recent two per cent cut in national insurance, the OECD estimates this figure will hit 37.7 per cent by 2029.
Despite higher taxes, the government’s fiscal position has remained fairly bleak.
So far this financial year, borrowing has totalled £116.4bn – the second-highest amount on record in that period. Public debt stands at 97.5 per cent of GDP, 1.8 percentage points higher than last year.
So what does this mean for the prospect of tax cuts?
If there were not an election around the corner, then it seems unlikely that a responsible government would be considering reducing tax cuts.
But there is, and over the past few weeks, the Treasury has been the benefit of a significant change in market expectations.
As inflation has come in under expectations, investors have brought forward their predictions for when central banks will start cutting interest rates.
This in turn has brought down yields on government debt and will likely give Hunt extra headroom to meet his target of getting debt falling in the fifth and final year of the OBR’s forecasts.
Analysts at Pantheon Macroeconomics estimate that the Chancellor’s headroom to meet his key fiscal target of getting debt falling will double to around £25bn.
Martin Beck, chief economic advisor to the EY ITEM Club, said that tax cuts in the Spring Budget “seem likely” given the extra headroom. Ashley Webb, UK economist at Capital Economics, also said that changing market view means there’s “still scope for a pre-election splash”.
But Samuel Tombs, chief UK economist at Pantheon Macroeconomics, pointed out that a big giveaway, which could risk a resurgence in inflation, will likely force the Bank of England to keep interest rates on hold for a little longer.
“We think that he will decide that it is best to promise tax cuts in the next parliament and to give the MPC scope to reduce interest rates,” Tombs said.