Earlier this month, British Chancellor of the Exchequer Jeremy Hunt said Britain would not go into recession this year.
Hannah McKay | Reuters
But he will also have to overcome the constraints of weak public finances and a sluggish economy that has recently entered a bit of a technical recession.
On the positive side, inflation is falling faster than expected and market expectations for interest rates are well below where they were at the time of Hunt's autumn statement in November.
“Overall, Hunt's fiscal space has probably increased, but only by a small amount and nowhere near the space in his autumn statement,” said Sanjay Raja, senior economist at Deutsche Bank. said. In research notes on Thursday.
The German financial institution estimates that the government's fiscal space will increase from about 13 billion pounds (about $16.46 billion) to about 18.5 billion pounds, and says it is “very likely” that tax cuts will be the first call. ”. Mr. Raja suggested that the finance minister may be cautious about easing fiscal policy, prioritizing support on the supply side rather than stimulating demand.
“In our view, supply-side measures are more likely, especially given the Bank of England's flexibility in monetary easing,” Mr. Raja said.
“National Insurance Contribution (NIC) tax cuts and child benefit changes are therefore likely to be delivered in the Spring Budget (as opposed to previous expectations for income tax cuts).”
Deep cuts to National Insurance were a highlight of Hunt's Autumn Statement, but economists say their benefits to payers will be offset by the impact of the existing freeze on personal income tax thresholds, known as a “fiscal drag”. He was quick to point out that it would be more than canceled out by. ”
UK National Insurance is a tax levied on workers' income and employer profits to pay state social security benefits, including the state pension.
Mr. Raja also suggested that an extension of the government's current fuel tax freeze remains a possibility, and that some spending cuts are likely to be used to partially offset fiscal policy easing. did.
Deutsche Bank expects Mr Hunt to deliver a net £15bn of relief in the next financial year, falling to around £12.5bn over the medium term.
“The fiscal outlook remains fragile. Small changes in the macroeconomic outlook can lead to big fiscal changes. The chancellor is determined to manage fiscal rules now and tighten fiscal austerity later,” Mr. Raja said. “We continue to walk a fine line between the two.”
“Certainly there are big questions about public finances, including whether spending cuts and limited increases in some areas are realistic to deal with the growing burden on public services, and the government's own ambitions on net zero, defense and overseas. It is certain that there remains 'development costs. ”
Economists at BNP Paribas expect more modest tax cuts worth around £10bn to be delivered across the 2024/25 financial year, with the government expected to start the year with a fiscal profit of around £11bn. are doing.
The Banque de France agreed that the cuts were aimed at stimulating labor supply and would have “little impact on inflation and thus on the Bank of England”.
Economists Matthew Swannell and Dani Stoilova said: “Our base case is that the government spends £10bn of its short-term fiscal inventory and uses the additional medium-term fiscal space to cut personal taxes. ,” economists Matthew Swannell and Dani Stoilova wrote in a research note titled “Last Chance Bars.” . ”
They also announced that the Treasury would postpone the March 2024 fuel tax rise for a further 12 months at a cost of £3.7bn a year, and that the basic rate of income tax would be permanently increased at a cost of £2-3. We expect to introduce a 1 pence cut. 6,073,500,000 pounds per year.
“The overall effect of this policy package will be to restore medium-term fiscal space to almost its original £12.7bn,” they added.
“With the Conservatives trailing in opinion polls and the Budget likely to be the last chance to ease fiscal policy before the general election, Hunt is once again likely to spend at least the additional fiscal space available. I look forward to doing that.”
