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0 The UK Treasury is seeking to damp the clamour for immediate tax cuts because officials are worried that high inflation and weak public finances undermine the case for action in the March Budget.
Ahead of an important speech on the economy on Friday, Jeremy Hunt has come under pressure from the right of the Conservative party and Tory-supporting newspapers to cut taxes in a dash for growth strategy.
The chancellor has told MPs, however, that tax cuts had to be delayed until closer to the election when the health of the public finances would be more certain and inflation lower.
Ministers want to avoid repeating the disastrous reaction to the “mini” Budget last September when the Liz Truss government ignored the Office for Budget Responsibility’s forecasts and temporarily put in place the largest unfunded tax cuts for 50 years.
With the government now determined to listen to the independent OBR, insiders confirmed that the fiscal watchdog had sent the first round of its economic forecast to the Treasury last week.
First reported in The Times newspaper, these show a small downgrade in medium-term growth forecasts, which would lead to lower tax revenues and could reduce the room for manoeuvre on taxes in the run-up to an election expected to take place in 2024.
The Financial Times has learnt that the first iteration of the forecast included a 0.2 percentage point reduction in the forecast growth rate in 2027-28. The OBR now thinks the size of the UK economy will be 0.5 per cent smaller in that year than stated in the Autumn Statement forecast.
If these changes are confirmed by the OBR at the March 15 Budget, they would represent a small revision compared with the 3 per cent downgrade the fiscal watchdog forecast last year.
The Treasury will only receive the public finance forecasts from the OBR on February 1.
Treasury officials, however, caution that lower wholesale gas prices are unlikely to lead to a large war chest for tax cuts.
With interest rate projections still high, the annual cost of government debt will not have fallen far. Officials are also expecting lower revenues from oil and gas taxation as well as windfall taxes because profits from the North Sea fields will drop.
Internal government projections suggest that oil and gas revenues might fall more than £10bn in 2023-24 on current prices although the hit to the public finances would be much smaller in the medium term.
Offsetting these effects, which would increase public borrowing and debt, are official figures for public finances this year, which are better than expected, despite the government borrowing a record £27.4bn in December.
The OBR said on Tuesday that once timing effects and a one-off adjustment for student loans were accounted for, underlying public borrowing in 2022-23 was running £11.3bn lower than expected.
The surprisingly strong public finance figures, it said, “was broad-based across central government receipts and spending, as well as borrowing by both local authorities and public corporations”.
On Wednesday the ONS reported that UK producer price inflation slowed to the lowest rate in almost a year in December, as cost pressures receded.
Producer input prices — the prices paid by businesses for materials and other goods — rose by an annual rate of 16.5 per cent in December, down from 18.0 per cent in November, and well below the peak of 25 per cent in June 2022.
Additional reporting by Valentina Romei in London
