As the UK prepares for the upcoming General Election, all eyes are on Finance Minister Jeremy Hunt as he gears up to deliver his Spring Budget. With the Conservative party trailing behind the Labour Party in the polls, there is significant pressure on Hunt to offer tax cuts as a sweetener to voters. However, he must also navigate the challenges posed by fragile public finances and a stagnant economy that has recently slipped into a modest recession.

Current Fiscal Situation

The Treasury has pre-announced plans to deliver up to £1.8 billion worth of benefits by boosting public sector productivity, which includes freeing up police time for more frontline work. This move is estimated to save the Treasury up to £20 billion per year by improving productivity levels to pre-pandemic standards. Additionally, there will be £360 million allocated for research and development (R&D) and manufacturing projects in key sectors like life sciences, automotive, and aerospace.

Economists anticipate that Hunt will utilize a small fiscal windfall to introduce modest tax cuts in the upcoming budget. While the fiscal headroom has marginally increased to around £18.5 billion, the focus is likely to be on supply side support over demand stimulation. Tax cuts to national insurance contributions (NICs) and changes to child benefits are speculated to be on the agenda, rather than income tax cuts. The government is expected to provide a net loosening of £15 billion in the next fiscal year, gradually decreasing to around £12.5 billion in the medium term.

Despite the potential tax cuts, concerns loom over the precarious state of public finances. There is a delicate balance between managing fiscal rules presently and avoiding increased austerity later. Questions arise regarding the feasibility of spending cuts and limited rises in certain areas to address the strains in public services and meet the government’s commitments to initiatives like net-zero, defense, and overseas development spending.

Projections and Outlook

BNP Paribas economists foresee a more conservative approach to tax cuts, estimating a package worth around £10 billion across the 2024/25 fiscal year. The government is anticipated to start the year with a fiscal windfall of around £11 billion, which will be utilized to stimulate labor supply without significant impacts on inflation. There are expectations for the postponement of the March 2024 rise in fuel duty for another year, along with a permanent reduction in the basic rate of income tax. These measures would help maintain medium-term fiscal headroom around £12.7 billion.

As the Spring Budget approaches, the focus remains on the potential impact of tax cuts in the UK. Hunt faces the challenging task of balancing voter expectations with economic realities while striving to boost productivity and support key sectors. The decisions made in this budget will have far-reaching implications for the country’s financial landscape and the overall well-being of its citizens.


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