Hunt handed £166bn war chest for tax cuts

Booming receipts and fall in energy costs give fiscal headroom to Chancellor, says economic think tank

Jeremy Hunt will have £166bn of headroom to cut taxes and invest in next week’s Budget, according to a leading economic think tank. The figure is nine times a prediction by the official spending watchdog in November, marking improvements in the economy after booming tax receipts and a fall in energy prices. The National Institute for Economic and Social Research urged the Chancellor to use this breathing space to rethink a planned corporation tax rise.

JEREMY HUNT will have £166bn of headroom to cut taxes and invest in next week’s Budget, according to one of Britain’s leading economic think tanks.

The figure is nine times a prediction by the official spending watchdog in November, underscoring improvements in the economy after booming tax receipts and a fall in energy prices.

The National Institute for Economic and Social Research (Niesr), which conducted the research, urged the Chancellor to use this breathing space to rethink a planned corporation tax rise from 19pc to 25pc amid a backlash from politicians and business leaders.

Mr Hunt has insisted the increase must go ahead, but business leaders and Tory backbenchers fear it will hold back Britain’s recovery and damage the country’s standing in the eyes of international investors.

The Office for Budget Responsibility (OBR) also said that Mr Hunt would achieve a secondary target, on debt, with £9.2bn of headroom. Niesr expects this to be 10 times larger at £97.5bn.

Treasury sources last night disputed Niesr’s figures, suggesting the fiscal headroom had not changed at around £9bn amid a downgrade in the UK’S long-term growth prospects.

A Treasury source said: “Officials genuinely think they put the decimal point in the wrong place.”

However, analysts said the figures suggested the Chancellor now has headroom for ambitious tax changes to support the economy.

Jumana Saleheen, chief economist at the investment manager Vanguard Europe, said that funds provided by greater fiscal space should be targeted to boost long-term growth.

She said: “Investors are shedding UK assets because they see weak productivity and Covid scarring. People have left the workforce and they haven’t returned.” Niesr’s predictions stand in stark contrast to forecasts by the OBR when Mr Hunt produced his Autumn Statement in 2022.

Its predictions, in the aftermath of Liz Truss’s disastrous mini-budget, were used by the Chancellor to justify a massive tax raid on workers and business.

The OBR said that even after Mr Hunt lifted the tax burden to its highest level since the Second World War, he would still only meet a target to bring borrowing below 3pc of GDP by 2027-28 with £18.6bn to spare. Niesr now expects him to have £166bn of headroom.

The OBR also said Mr Hunt would achieve a secondary target, on debt, with £9.2bn of headroom. Niesr expects this to be 10 times larger at £97.5bn. The Treasury is under growing pressure to cut taxes as the fiscal outlook improves.

Business leaders and the free market wing of the Conservative Party warn that the planned rise in corporation tax in April will damage investment.

The economic outlook has improved dramatically since Mr Hunt’s Autumn Statement and the OBR’S last forecast, driven chiefly by a very steep fall in energy prices, which have dropped by around two thirds after a mild winter.

Katharine Neiss, chief European economist at PGIM Fixed Income, Prudential Financial’s asset management arm, said: “The bottom line is that growth has come in a lot better than people were expecting.”

But she warned that the UK faces major headwinds in the wake of America’s Inflation Reduction Act, a $369bn (£310bn) package of tax credits and subsidies for green technology companies, which the EU is trying to match.

Ms Neiss said: “The UK’S ambition to be a green technology hub will be much more difficult in a world where two huge economic regions are throwing money at this.”

Stephen Millard, Niesr’s deputy director for macroeconomics, called on Mr Hunt to cancel plans to raise corporation tax.

He said: “The planned rises in corporation tax will have a big, big, big impact on trend output.”

The gulf between the Niesr and OBR forecasts is partly explained by the fact that Niesr expects inflation to be higher than the OBR expects, remaining above the Bank of England’s target rate of 2pc for the next three years.