Jeremy Hunt is expected to announce tax cuts in Wednesday’s budget in an attempt to reboot the government’s flatlining performance in opinion polls, with the country in recession amid the cost of living crisis.
The chancellor has come under pressure from within Conservative ranks for bold action, although he has cautioned that any measures would need to be “prudent and responsible” while inflation remains above the 2% target and government debt at its highest level since the 1960s. Here are five key charts that will underpin his statement.
Tumbling inflation
Inflation in the UK has fallen by more than expected since the Office for Budget Responsibility (OBR) published its forecasts for the economy and the public finances alongside the chancellor’s autumn statement.
The headline rate has fallen to 4%, down from more than 10% a year earlier, enabling Rishi Sunak to meet his goal of halving inflation.
The Bank of England forecasts a further fall to below 2% this spring amid cooling global energy prices and slower growth in food and drink prices. Slower inflation does not mean prices are coming down, however, only that they are rising less quickly.
Financial markets expect the Bank to begin cutting interest rates from as early as the summer. But the central bank has warned that a tight jobs market, resilient wage growth and price increases in the service sector of the economy could push inflation back above its target later this year.
Weak economic growth
The UK economy fell into recession at the end of 2023 as households cut back on spending. Official figures show GDP fell by 0.3% in the fourth quarter, after a decline of 0.1% in the third quarter. Economists regard two consecutive quarters of decline as a recession.
In November, the last OBR forecast showed the economy would narrowly avoid a recession in late 2023 before picking up to grow by 0.7% in 2024. Growth was then forecast to pick up to 1.4% in 2025 and 2% in 2026 and 2027.
The OBR will update its predictions on Wednesday. Official projections for a larger UK population than previously expected, which could provide a boost to GDP over the long term, as well as lower inflation and interest rates could provide a tailwind.
However, in the short term, growth is expected to be weaker. The consultancy Capital Economics expects the OBR to downgrade its GDP forecasts for 2024 to zero growth, and to 1.3% for 2025.
Fiscal headroom
Hunt has a self-imposed “fiscal rule” requiring government debt to be falling as a percentage of GDP in the fifth year of forecasts prepared by the OBR. At the autumn statement, he met this rule with about £13bn to spare, which is often described as the chancellor’s “headroom” against meeting this target.
In November, the OBR put government debt as a share of GDP at 89% for 2023-24, rising to 93.2% by 2027-28, before only falling slightly to 92.8% in the fifth and final year.
It is understood the OBR has presented Hunt with forecasts showing headroom of about £13bn before any tax and spending decisions are taken at the budget, limiting his wriggle room.
Tax cuts?
Hunt has said he will announce “permanent cuts in taxation”. It is expected this could entail a cut in national insurance, while a freeze in fuel duty is likely. However, Wednesday’s measures are unlikely to entirely offset other measures which are pushing up overall levels of taxation.
The biggest of these by far is the six-year freeze on income tax thresholds, which the Institute for Fiscal Studies thinktank estimates will raise £44bn, of which £29bn will have been collected by April 2025.
Overall tax levels are on track to reach the highest sustained level, as a share of GDP, since the second world war.
Austerity
Hunt’s tax cuts at the autumn statement were almost entirely funded by £20bn of real-terms reductions to public spending planned from 2025. Reports have suggested the chancellor could impose tighter restraint on the public sector on Wednesday to find more money for tax cuts.
Under current plans, the Resolution Foundation estimates that protected government departments – including the NHS, education, defence and overseas aid – would see a modest real-terms increase in their per capita funding.
However, further restraint in the public sector would mean unprotected departments – including local government and prisons – facing a sharp decline, worth about £30bn a head.
