UK has limited room for manoeuvre as Hunt prepares for Wednesday's budget

UK chancellor Jeremy Hunt will struggle to raise taxes or find savings in his budget.

UK chancellor of the exchequer Jeremy Hunt delivers his first budget tomorrow, setting out tax-and-spend policies for the last full year before the next British election.

The most pressing issues he faces are high inflation, weak growth, strikes and labour shortages. To complicate matters, the UK's Office for Budget Responsibility, or OBR, judges that he barely has any money for permanent giveaways.

With the UK tax burden at a post-war high and public services creaking, he will struggle to raise taxes or find savings. That points to a tricky balancing act for the chancellor and Prime Minister Rishi Sunak’s government.

“There are plenty of demands on the chancellor for a loosening of the purse strings,” George Buckley, an economist at Nomura, wrote in a note to clients. The statement is due at 12:30pm. 

Economic decline

At the statement in November, the OBR expected the British economy to shrink 1.4% this year. The average of independent forecasts is now a 0.7% decline. An upgrade is expected but GDP will still contract.

Longer-term, the OBR was too optimistic in November about the UK’s potential, with growth of 2.7% in 2026 and 2.2% in 2027. A downgrade is expected at the back end of the forecast. The combined changes will leave output in 2028 largely unchanged from November. 

Borrowing for 2022-2023 is running about £30bn (€34bn) below the OBR’s forecast, since the economy delivered more tax revenue than expected. Short-term, some of that is expected to persist and give Mr Hunt a bit of headroom for temporary giveaways.

Corporation tax rises from 19% to 25% in April, when the 130% super-deduction tax break on investment is scrapped. Business groups have called it a double whammy that will deter investment.

There will be two main measures to help households with the cost of living. 

The energy price guarantee is expected to be kept, leaving the typical annual household energy bill at £2,500, rather than raising it to £3,000. That will cost about £3bn for three months’ support. 

After that, lower energy prices in wholesale markets are pointing toward bills falling below £2,500.

Fuel duty is expected to be frozen, rather than rise the scheduled 23%, costing £6bn permanently. 

Bloomberg