UK Treasury Secretary Jeremy Hunt said the UK should have a “20-year plan” to become the world’s next Silicon Valley.
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LONDON — Britain’s Treasury Secretary Jeremy Hunt is set to deliver the government’s budget commitments on Wednesday against a better-than-expected economic backdrop, but economists expect him to remain cautious for now.
In his autumn statement in November, Hunt unveiled a £55 billion ($66 billion) package of tax hikes and spending cuts to plug a significant hole in the country’s public finances and restore its fiscal credibility.
A sharp improvement in the country’s fiscal position and a sharp fall in wholesale natural gas prices since Hunt took office late last year led the government to a surprise budget surplus of £5.4 billion in January.
Public sector borrowing has also fallen by around £30 billion year-to-date, economists noted this week, partly due to higher-than-expected tax receipts. This will lend credibility to Hunt’s goal of reducing public sector net borrowing to below 3% by 2027/28.
However, the UK remains the only major G-7 economy to fully recover output lost during the Covid-19 pandemic, and households continue to grapple with a cost-of-living crisis amid sky-high food and energy bills.
The UK economy stagnated in the last quarter of the year to narrowly avoid entering a technical recession, but suffered a sharp slump in December. New data on Friday showed the economy grew 0.3% annually in January, beating expectations.
The independent Office for Budget Responsibility late last year forecast the sharpest decline in living standards on record amid a five-quarter recession, with GDP contracting 1.4% in 2023.
Deutsche Bank hinted in a note on Wednesday that this is likely to be revised down to just 0.5% contraction, in line with the Bank of England’s forecast for a flatter downturn.
“Money to play with”, but this time “no frills”.
In a research note last week, BNP Paribas Europe’s chief economist Paul Hollingsworth has forecast UK borrowing forecasts to be cut by £10-15bn from Wednesday’s budget.
The French bank estimates that the chancellor’s “improving macroeconomic backdrop and better-than-expected performance of public finances” have brought him a windfall of between £25 billion and £30 billion.
But while Hunt will likely have “money to play with” as falling energy prices, lower near-term interest rate expectations and a more resilient global economy all point to stronger near-term growth, Hollingsworth suggested the chancellor will “just give around half of it” while the rest being paid for “probable pre-election giveaways”.
With general elections approaching before the end of 2024, Prime Minister Rishi Sunak’s Conservative Party is at least 20 points behind the main opposition Labor party in most national opinion polls.
“We expect the Chancellor to meet his fiscal targets a year earlier than previously forecast, bolstering his fiscal credibility after a turbulent 2022 for the Treasury,” Hollingsworth added.
Setting up for fall
The apparent fortune turnaround has also led to increased pressure on Hunt within his own party to address the country’s tax burden, which is at a 70-year high.
The fall statement raised corporate taxes from 19% to 25% for the fiscal year beginning April 1. Hunt told CNBC last month that taxes will be cut for both businesses and individuals “as soon as we can afford it.”
After the market chaos triggered by September’s tax-cutting “mini-budget” in the context of high inflation, which ultimately led to the resignation of former Prime Minister Liz Truss, Barclays Hunt also expects to resist calls to spend big this cycle, instead focusing on “modest measures to ease fiscal pressure.”
The British bank forecast a small fiscal easing package totaling around £4bn in 2022-23.
“Measures are likely to include keeping the energy price guarantee unchanged at £2,500 in the second quarter, freezing fuel taxes for another year and offering more money to government agencies to hold pay rises of around 5% in years 23-24 3.5% currently budgeted,” predicted Silvia Ardagna, Barclays’ Chief European Economist.
In November, Hunt unveiled plans to raise the Government’s energy price cap for a typical household to £3,000 a year from April 1 from the current £2,500.
Sanjay Raja, senior economist at Deutsche Bank, suggested that Hunt will present a “no frills” budget focused on the cost of living crisis and public services. He agreed that the fuel tax would remain frozen and suggested keeping energy subsidies for households and businesses for the next three months.
Like BNP Paribas, Deutsche expects to raise public sector wages by 5% in a bid to break deadlocked wage negotiations between the government and several unions.
The country has been ravaged by widespread industrial action by railroad and postal workers, nurses, doctors, teachers, lawyers and civil servants over the past six months.
“Looking ahead, we expect the Chancellor to hint at further fiscal easing later this year. Under current fiscal rules and updated forecasts, we expect Chancellor to spend around 13bn. GDP fell in 2027/28 – a small margin by historical standards, but still an improvement compared to last year’s forecast,” Raja said.
“We think this could give way to a more generous fall statement later this year with some modest tax cuts and likely spending gifts.”