Jeremy Hunt gets space for 'big pre-election splash' in tax-cutting Budget as borrowing falls, say economists

Jeremy Hunt gets space for 'big pre-election splash' in tax-cutting Budget as borrowing falls, say economists

Jeremy Hunt has gained more space for a “big pre-election splash” in his March budget, economists said on Tuesday after better than expected public finances figures.

The Chancellor is expected to unveil a series of giveaways, possibly to income tax and changes to child benefit, in the spring ahead of an autumn general election.

The latest figures suggested he may get “headroom” of around £20 billion to do so and could announce a further wave of tax cuts in a second fiscal statement later in the year.

The Government borrowed less money last month than in any December in four years but debt remains at historical highs, the new data suggested.

The Office for National Statistics (ONS) said that public sector net borrowing hit £7.8 billion during the month.

That was £8.4 billion less than a year earlier and the lowest in any December since 2019, and below City expectations of £11.4 billion.

Ruth Gregory, deputy chief UK economist at Capital Economics, said: “December’s better-than-expected public finances figures brought some cheer for the Chancellor after the recent run of poor outturns and will give him a bit more wiggle room for a big pre-election splash in the Spring Budget on 6th March.”

She added that the Chancellor may get “headroom” of about £20 billion if the Office for Budget Responsibility revises down its borrowing forecast significantly from 2025/26.

Ms Gregory continued: “That will probably allow him to unveil a freeze in fuel duty in April 2024 (costing about £6bn a year) but perhaps also to announce more crowd-pleasing measures, such as a 1p cut to income tax (costing £6.9bn a year), while still maintaining fiscally prudent appearances.”

Predicting that the OBR will revise down its forecast for debt interest payments, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, added: “The Chancellor, therefore, can use this near-term windfall to cut taxes without provoking the gilt market’s ire.”

He also argued that the figures for last year showed Rishi Sunak had failed to “make sure our national debt is falling” , though, the Prime Minister did not put a timescale on this pledge.

Cara Pacitti, senior economist at the Resolution Foundation, said: “Lower-than-expected inflation late last year has reduced debt interest costs and given the Chancellor a timely fiscal boost ahead of his Budget in March.

“However lower inflation is also likely to mean lower tax receipts. How these factors offset each other will be important in deciding how much fiscal headroom the Chancellor has.”

Experts expect the economy to pick up slightly this year but warn that it may have dipped into recession in the second half of last year.

Part of the drop in the December borrowing figures was due to the re-evaluation of the value of student loans a year ago, which added £10 billion to the Government’s books at the time.

Analysts had expected borrowing to hit £11.4 billion this December.

Overall Government debt was around 97.7 per cent of the UK’s annual gross domestic product (GDP), around 1.9 percentage points higher than a year earlier and at levels last seen in the early 1960s, the ONS said.

Total net debt was £2.69 trillion at the end of the year, which is around 97.7 per cent of the size of the economy, or gross domestic product (GDP).

Despite the fall in net borrowing last month, the debt to GDP ratio is 1.9 percentage points above last December and still at levels not seen since the early 1960s.

“Protecting millions of lives and livelihoods during Putin’s energy shock and a once-in-a-century pandemic has created economic challenges,” said Chief Secretary to the Treasury Laura Trott.

“However, it is right that we pay back these debts so future generations are not left to pick up the tab.”