Dear Sir Keir, I’m afraid there is no money left

Maxing out the economy for the sake of a few tax breaks feels like a scorched earth policy from Tories

My goodness: £20bn of headroom for pre-election tax cuts. This is the almost entirely artificial number that analysts broadly agree might be available for the Chancellor to play with following slightly better than expected government borrowing figures for December.

For the Prime Minister, Rishi Sunak, it’s like manna from heaven, enabling one last throw of the dice – or maybe two, assuming a second fiscal event beyond the Budget on Mar 6 can be squeezed in before the general election. Sadly, for Downing Street, it’s unlikely significantly to shift the electoral dial.

Voters demand change after the paralysing missteps of recent years; bribing them with their own money isn’t going to alter that verdict.

Besides, a recent Yougov poll found that a substantial majority would prefer the Government to prioritise improvements in public services over tax cuts.

Since when did this become a binary choice? Truth be told, voters are perfectly entitled to expect both. Yet what we have is the very reverse – an electorally poisonous combination of both deteriorating public services and rising taxes. Things may be about to turn the corner, but the damage is already too great.

The feelgood factor needed to buoy the Government’s prospects is simply not there, and nor is there any Jeremy Corbyn to frighten the living daylights out of those inclined to vote for the Opposition.

Action ahead of the election on tax and spend therefore takes on elements of a scorched earth strategy. If Downing Street “maxes out” on tax cuts, it’s going to be hard to impossible for Labour to reverse them so as to pay for the party’s ever growing list of spending priorities.

We’ve seen that movie before in the runup to the 1992 election, which Labour had been expected to win. The shadow chancellor, John Smith, said he would be raising taxes to fund better public services, including an increase in the top rate of income tax from 40pc to 50pc. It did not land well, enabling John Major’s incumbent government to campaign on the basis that voters faced a much higher tax burden under Labour. We must assume that the Labour leadership will not be making the same mistake again.

As it is, much of the supposed scope for tax cuts is little more than a mirage, since it is highly dependent on pencilled in but as yet unspecified cuts in future departmental spending. In practice, these are almost certainly undeliverable, even with the wonders of artificial intelligence.

Falling interest rates, which significantly reduce the Government’s ongoing debt servicing costs, provide the bulk of whatever remaining room for manoeuvre it might have.

The Chancellor, it seems, is determined to use up every last inch of it. The roster of tax cuts announced in the Autumn Statement as a taster of bigger things to come weren’t really tax cuts at all, since they merely undid a little of the rise in the burden already baked in.

This time around, the Chancellor needs to go further than the usual smoke and mirrors; he needs to be able to point unambiguously to a declining tax burden.

Voters are not stupid. The reason last autumn’s 2 percentage point cut in employee National Insurance contributions – worth around £450 a year to someone on average earnings – failed to improve the Government’s abysmal poll ratings was because, for most people, it is more than offset by the five-year freeze in personal allowances. In the round, employees are still worse off.

As for precisely how much scope the Chancellor has to reverse this position, that’s a bit like angels dancing on the head of a pin. It is crucially dependent on the assumptions the Office for Budget Responsibility uses in drawing up its forecasts.

To the fury of all the usual suspects, the Treasury was this week reported by Bloomberg as having warned Sunak when he first became prime minister that tax cuts would have a limited impact on growth. Far more important would be highly skilled immigration and reform of the planning laws to allow more housebuilding.

In the event, Sunak is clamping down on immigration and has backpeddled on planning reform. But he still aims to go full throttle on tax cuts in the hope of unleashing a 1980s-style boom. The Treasury’s warnings have been studiously ignored.

The OBR is acutely sensitive to accusations that it is hide-bound by Treasury orthodoxy of this type, and has spent quite a lot of time trying to counter them.

An entire OBR paper was recently devoted to so-called “dynamic scoring”, or assessing the wider economic implications of changes in fiscal policy beyond their direct impact on the public finances. Even so, I doubt its assessment is about to conclude that Hunt’s tax cuts on Mar 6 will more than pay for themselves in enhanced growth, which is what the Chancellor would have liked.

Liz Truss was so frustrated by the straitjacket of OBR assessment that she dispensed with its services altogether in her 2022 mini-budget. It did not end well.

The OBR’S job is to judge whether changes to tax and spend measure up to the constraints placed on the public finances by the Government’s own fiscal rules.

Yet the idea that the Government’s scope for action is entirely determined by these assessments is not quite right. There is, in fact, a much more important adjudicator: the discipline of markets.

Planned gross debt issuance this financial year alone is £241.1bn, or more than 10pc of all Government revenue. To this must be added the £100bn of gilts the Bank of England is scheduled to sell back to markets under its Quantitative Tightening programme.

With the national debt already approaching 100pc of GDP, there must be limits on the willingness of markets to keep buying up such vast quantities of issuance. These limits are being tested to virtual breaking point regardless of whatever the OBR has to say about it.

Get the judgment wrong, and markets will demand a premium for their lending, leaving interest rates higher than they would be otherwise. If the Chancellor goes too far, it becomes a zero sum game, with tighter money cancelling out the demand-side benefits of looser fiscal policy.

But he will also aim to leave nothing in the kitty for Labour to squander, echoing the note left by Liam Byrne to his successor as chief secretary to the Treasury when Labour was voted out of office nearly 14 years ago.

“Dear chief secretary, I’m afraid there is no money. Kind regards – and good luck!”

‘This time, the Chancellor needs to go further than the usual smoke and mirrors on tax cuts’