Chancellor struggles to find headroom for big giveaways


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Jeremy Hunt’s Budget was meant to be a defining pre-election moment, but some senior Conservatives have become dismayed at the influence over their political fate wielded by unelected economists.

There has been growing frustration in Tory circles that the independent UK fiscal watchdog has the chancellor in a “headlock” and that its deteriorating economic forecasts in recent weeks have limited the scope for him to make big tax cuts on Wednesday.

Hunt admitted on Sunday that the forecasts have “moved against us”, while those close to the Budget process have spoken of the “agony” of having to ditch measures as the Office for Budget Responsibility’s numbers got progressively worse.

Recent OBR forecasts have given Hunt just £13bn of “headroom” against his own fiscal rules, which pledge to have debt falling as a share of gross domestic product in five years’ time.

Given the political imperative to cut taxes on March 6, Hunt has been casting around for measures to raise revenues — for example by stealing Labour’s plan to curtail tax breaks for foreign domiciled nationals resident in Britain — to fund them.

Public spending plans in the next parliament could also be curtailed to create more fiscal space, even if some leading economists believe that no future chancellor would be able to see the cuts through.

Some Tories yearn for the days before the OBR, created in 2010 by the then Tory chancellor George Osborne to provide transparency to the public finances and to end the days of dubious economic forecasts by politicians.

Former cabinet minister Sir Simon Clarke said last week: “I recognise the value of the OBR in providing independent assessment, but this responsibility has morphed into their determining what the chancellor is and is not permitted to do.”

Lord David Frost, another former minister, said: “The Treasury has allowed the OBR to usurp its own role and effectively to reach judgments for the government about the economy and about tax and spending policy.”

There have also been tensions between the OBR and the Treasury, not least when Richard Hughes, chair of the watchdog, said in January that Hunt’s spending plans for after the election were beyond “fiction”.

James Bowler, the Treasury’s permanent secretary, frostily told a House of Lords committee: “I don’t agree with the language he used.”

Nevertheless, Hunt over the weekend defended the role of the OBR and the way it polices the government’s fiscal rules. “The reason we have them is to give confidence to the British people and to the world that we are a country that pays back our debt,” he told the BBC.

Treasury insiders admitted to finding some of the OBR’s recent forecasts “infuriating”, but insisted the watchdog played a crucial role.

“It’s a lot better than the days when Labour used to just make them up,” said one. Former premier Liz Truss controversially sidelined the OBR in her government’s ill-fated “mini” Budget in 2022.

Hunt received a further set of projections from the OBR on Friday, teeing up a tight Budget without the scope for big pre-election giveaways that the Tories were hoping for just over a month ago.

Treasury insiders have signalled that Hunt’s fiscal headroom — before taking account of any measures to be announced by him on Wednesday — would be at best unchanged from the £13bn that was left after the tax cuts in last year’s Autumn Statement.

That is markedly below the opening position Hunt was working with ahead of the fiscal event in November, when he had £30bn on the table, allowing him to announce £20bn of reductions in national insurance and business taxation.

Hunt admitted the OBR forecasts on that occasion “went in our favour, unexpectedly, quite close to the end”.

Hunt will be reluctant to drive the fiscal headroom down below the historically low £6.5bn that remained after the Budget in March last year, leaving him with little room for manoeuvre.

The modest amount of wiggle-room is in part because the OBR is expected to lower its inflation forecast compared with November following quicker-than-expected declines in UK price growth to 4 per cent, leading to lower estimates for nominal GDP and thus a weaker outlook for tax revenues.

Analysts at Capital Economics said there was also a chance the OBR will reduce its outlook for economic growth in the coming years, dragging on receipts.

The OBR reduced its 2024 real GDP growth projection from 1.8 per cent to 0.7 per cent in the Autumn Statement, but that is still stronger than more recent predictions by the Bank of England.

There is also a possibility that the OBR will trim back its estimates for potential growth, which are also more optimistic than the central bank’s latest figures. Higher population estimates released since November could, on the other hand, give the GDP forecasts a lift.

Hunt will expect a further tailwind from lower borrowing costs, as financial markets bet on BoE interest rate cuts from the current level of 5.25 per cent in the coming months.

However, investors are now less optimistic about the speed of those rate cuts than late last year, meaning this factor could prove less of a boon to the chancellor than he had previously hoped.

The final fiscal headroom figure remains highly uncertain, as it is extremely sensitive to fluctuating economic assumptions. The November headroom amounted to just 0.4 per cent of GDP.

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