One man, two guvnors: Why markets and MPs both have a say on Hunt’s Autumn Statement
Chancellor Jeremy Hunt will be treading a fine line between meeting his fiscal targets and assuaging the concerns of Conservative MPs when he delivers the Autumn Statement on Wednesday.
With growth stalling and the tax burden rising to the highest level in the 70 years, a number of Conservative MPs have demanded that Hunt slash taxes to stimulate growth.
But Hunt is unlikely to budge given the state of the public finances. The Office for Budgetary Responsibility (OBR) handed in its latest forecasts at the end of last week, and while better than previous forecasts, it won’t give the Chancellor much cheer.
The independent fiscal watchdog is expected confirm that Hunt has between £10bn and £15bn of fiscal headroom to meet his key target of getting debt falling as a proportion of GDP in the fifth year of the forecast period.
Hunt finds himself in the plot of One Man, Two Guvnors, in which one butler finds himself trying to please two bosses with almost diametrically opposed ideas.
The level of breathing space is greater than the £6.3bn Hunt was granted in March, reflecting stronger-than-expected growth in the UK this year and swollen tax receipts thanks to inflation.
However, whatever headroom Hunt is granted will be relatively small compared to recent chancellors. The average headroom since 2010 has been about £25bn, according to Capital Economics.
“It would not take much of a deterioration in the OBR’s economic forecasts to wipe out the headroom altogether,” analysts at Capital Economics noted.
The OBR’s forecasts also rely on the government’s stated policies, some of which may never come into practice.
For example, maintaining the fuel duty freeze – which every Chancellor has done since 2011 – would take away as much as half of the Chancellor’s headroom, according to Capital Economics. The forecasts also assume that government spending will stay flat despite the rise in inflation, amounting to a significant spending cut in real terms.
Given the difficult fiscal position, Hunt is likely to search for some savings on government spending. The Treasury have reportedly considered using October’s inflation figures rather than September’s to uprate benefits while the Triple Lock may be pegged to a lower level of wage growth.
These savings will allow Hunt to offer some sweeteners to his restive backbenchers. Although he is widely expected to eschew big tax cuts, reforms to inheritance tax have been widely reported.
According to the reports, Hunt could slash the rate of inheritance tax and even announce its eventual abolition. Treasury officials argue the policy would not be inflationary, unlike cutting income tax rates.
The Chancellor is also reported to be considering extending the full expensing of capital investment by three years. This policy, which business groups have been calling for, would cost the Treasury around £10bn.