Tension mounts as Spring Budget draws closer

With less than a week until the Spring Budget the tensions underlying the Chancellor’s fiscal statement have been on display once again. Ever since the Budget date was unveiled during the Christmas break Mr Hunt has had to strike a balance between the need to make tax cuts and the duty to follow his own fiscal rules and get public debt falling.

Pressures to cut taxes have largely come from within the Conservative Party as the government look for a pre-General Election boost. Meanwhile, mixed economic and fiscal news has reinforced the need for caution. Here we take a look at the tensions facing the Chancellor before the Spring Budget on 6 March.

NICs and vapes

According to reports in The Times newspaper, the Chancellor is considering two main cuts. A one percentage point reduction in employee National Insurance contributions (NICs) and an extension of a cut in fuel duty.

The Chancellor is also expected to announce a ‘vaping products levy’ charged on manufacturers and importers of the liquid in vapes. It is anticipated the costs would be passed on to consumers with the hope that it would make the habit unaffordable for children.

Fiscal headroom

According to the reports, final decisions were yet to be made as the Treasury awaited updated forecasts for the economy and the public finances from the Office for Budget Responsibility (OBR), due on 1 March.

The figures from the OBR will determine the headroom Hunt has within the self-imposed target for government debt to be falling as a share of the economy by the fifth year of the forecast.

However, January’s public finance figures showed the biggest monthly surplus on record in January.

The public sector recorded a surplus of £16.7 billion, according to the Office for National Statistics. The numbers left borrowing in the fiscal year to date £9.2bn lower than previously forecast by the OBR.

Everyday challenges

These figures will only encourage groups of Conservative MPs to push for tax cuts. The latest ones to do so are the One Nation group, which recently issued eight policy recommendations they want Mr Hunt to implement at the Budget.

They include a multi-year settlement for childcare funding, a commitment to average interest rates for graduates paying back student loans, reforms to stamp duty to incentivise local councils to build more houses, and a levy on foreign owners of vacant luxury flats that are purchased for investment purposes.

The One Nation group has also urged the chancellor to allow first time buyers to put up to 25% of their tax-free pension savings into the deposit for their first-time home and has called for income to be taxed at the same rate, regardless of the source - whether that be earnings, benefits, or dividends.

Lacking credibility

However, the Institute for Fiscal Studies (IFS) has said that Jeremy Hunt’s financial planning ‘lacks credibility’.

The IFS says the Chancellor should not announce tax cuts in the Budget if he cannot lay out how he will fund them.

The economic thinktank calculates that Hunt will need to find £35 billion of cuts from public services if he plans to use a spending freeze on government spending to pay for pre-election giveaways.

Resisting temptation

Martin Mikloš, a Research Economist at IFS, said:

In November’s Autumn Statement, the Chancellor ignored the impacts of higher inflation on public service budgets and instead used additional tax revenues to fund eye-catching tax cuts.

At next week’s Budget, he might be tempted to try a similar trick, this time banking the higher revenues that come from a larger population while ignoring the additional pressures that a larger population will place on the NHS, local government and other services.

He might even be tempted to cut back provisional spending plans for the next parliament further to create additional space for tax cuts.

The Chancellor should resist this temptation. Until the government is willing to provide more detail on its spending plans in a Spending Review, it should refrain from providing detail on tax cuts.

Spring Budget

The Chancellor will deliver the Spring Budget, alongside a forecast from the independent Office for Budget Responsibility (OBR), on 6 March. 

Mercia’s tax experts will be watching and will provide detailed analysis of the day’s announcements. Keep your clients up to date with our range of digital and printed products.