Jeremy Hunt is running out of time to do the right thing for business

Pressure is mounting on the Chancellor from many quarters to scrap increase in corporation tax to 25pc

‘Dropping the planned rise might cost £15bn a year but with a good chance of recouping this later’

Believe it or not, this Wednesday we are going to undergo yet another Budget, the third since last March. In some ways it is going to seem like a return to the hallowed traditions of yore, with the Budget clashing with the Cheltenham racing festival. Under Chancellor Nigel Lawson, it could be a close-run thing as to which would provide more excitement.

However, this Wednesday surely racing will win the excitement contest. Nowadays, chancellors are constrained by the Office for Budget Responsibility (OBR).

Nevertheless, there is a huge contrast between the circumstances surrounding this Budget and Jeremy Hunt’s last “fiscal event” in November. At that point, the prime requirement was for Mr Hunt to make it plain that he was not Kwasi Kwarteng.

You will recall that September’s “mini” Budget from Mr Kwarteng had so alarmed the financial markets that not long afterwards, he was sacked by the prime minister, Liz Truss, who was herself soon forced out by her MPS.

With his sober, do-nothing Budget last November, Mr Hunt undoubtedly met his objective. Since then, though, not only have financial markets calmed down but international energy prices have plunged, the inflation rate has started to fall and interest rates seem set to peak not far above the current level. What’s more, the economy is a fair bit stronger than almost anybody had predicted.

Higher GDP has had the usual favourable effects on the public finances. Moreover, economic activity has turned out to be especially “tax rich”. In the current tax year, borrowing is running some £30bn below what the OBR expected last November. Similarly, next year’s borrowing is likely to be revised down by some £26bn.

You might well think that this gives the Chancellor room for tax giveaways and/or judicious spending rises. Indeed, he is likely to do some of this, including scrapping the increase in the Energy Price Guarantee on April 1 and dropping the planned 23pc rise in fuel duty. Meanwhile, he will probably announce some increases in spending, including for Defence.

However, the overall amount that he dishes out is probably going to be pretty minor. To some extent, the financial markets pose a restraint. The Government certainly would not want to see the pound falling sharply on the exchanges, nor bond yields going up, as happened last September. In practice, both these are unlikely to happen. It is true that any sort of fiscal relaxation could prompt the Bank of England to be somewhat tougher on interest rates than it would otherwise be. Yet, given the economic situation, the Bank’s reaction is unlikely to be strong.

No, the real restraint on what the Chancellor can do is the apparent imperative to meet his own self-imposed fiscal rules. Whether those rules are met, and with how much room to spare, is judged by the OBR. These rules state that the ratio of government debt to GDP should be falling in five years’ time and the government’s deficit should not exceed 3pc.

But why these rules and why five years’ time? Answers on a postcard please! The purpose of the rules is to constrain the Chancellor and thereby to give the markets some reassurance that no matter how high the debt is now, it is manageable because it will be falling not much further into the future. But the precise formulation is entirely arbitrary and there have been 12 sets of rules in eight years. Indeed, the current incarnation only came into being last November.

We have been warned to expect that although the OBR will acknowledge an improvement in the immediate fiscal position, it will argue that a prospective shortage of workers and various other changes in the economic environment will mean that in five years’ time the Chancellor will actually have slightly less headroom to meet his fiscal rules than was thought back in November. It is this fiscal pessimism from the OBR which is responsible for the Government supposedly sticking to its plans to raise corporation tax from 19pc to 25pc.

This regime is questionable, to put it mildly. As Mark Twain is supposed to have said: “Prediction is difficult – particularly when it involves the future.” I am sure that he would have had something fruity to say about forecasts for five years ahead.

The vagaries of forecasting are far from being a mere joke. They can have major effects on policy and a five-year horizon can pose serious constraints. If the Chancellor were to drop the planned increase in corporation tax this might cost some £15bn a year in the short term. But there is a good chance this would be recouped later, and especially strongly beyond the five-year horizon. Admittedly, this would still leave £15bn more per annum to borrow over the next few years and the OBR is likely to be sceptical of the extent to which the lower corporation tax would be self-financing. Unless the Chancellor found equivalent savings from somewhere this might well require some tweaking of the fiscal rules.

However, that ought not to be beyond the wit of man. Unlike in the Truss/kwarteng episode, whatever the Chancellor did would have to be costed by the OBR and these costs included in the overall fiscal numbers.

It is not only a barrage of Conservative MPS who wish to see the corporation tax rise rescinded. This is also the view of three former Conservative chancellors, only one of whom is Mr Kwasi Kwarteng, plus the representatives of business, large and small, and a phalanx of independent economists. The latest to join this group is the National Institute for Economic and Social Research, not noted for Conservative leanings. When berated for changing his mind on an important issue, John Maynard Keynes is reputed to have retorted: “When the facts change, I change my mind. What do you do, sir?” Well, Messrs Hunt and Sunak, what do you do?