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UK chancellor Jeremy Hunt’s hopes of offering big pre-election tax cuts have suffered a setback after the Treasury produced internal forecasts suggesting he will have only limited scope for giveaways.
The Treasury’s internal analysis said Hunt will have fiscal headroom — the buffer against his own borrowing rules — of £14bn, only marginally more than the £13bn he put aside in his Autumn Statement in November.
The Treasury estimate is considerably lower than the headroom forecast by independent analysts and may be seen by some as an attempt to manage expectations of the scope for tax cuts ahead of the March 6 Budget.
The estimates will not be finalised by the Office for Budget Responsibility until the tail-end of the budget process.
The Treasury said: “While we have doubled our headroom since March [2023], from £6.5bn to £13bn, it remains low by historical standards and can be wiped out by changing economic conditions.”
The size of the headroom is highly volatile given the impact of shifts in rate expectations as well as changes in economic variables, including inflation. Just a one percentage point change in interest rates and inflation could cost £29.6bn by the end of the forecast, more than wiping out the current headroom, according to the Treasury.
Market analysts are more optimistic about the likely scale of the headroom: Capital Economics has predicted Hunt will have headroom of £19bn, for example, while Bloomberg Economics has forecast a buffer of between £17bn and £25bn.
The Treasury analysis, confirmed by government sources, comes ahead of the first pre-Budget fiscal forecast by the OBR next week, which will form the basis for Hunt’s tax and spending decisions.
The OBR will produce several updated forecasts between now and the Budget, and Treasury insiders confirmed that the amount of headroom available to Hunt could continue to swing by a large amount in either direction.
The fiscal headroom represents the OBR’s assessment of the amount of leeway Hunt will have against his self-imposed target of cutting debt as a share of gross domestic product in five years’ time.
The chancellor is expected to use a considerable amount of any headroom given to him by the OBR to fund tax cuts. Both Hunt and Rishi Sunak, prime minister, have talked up the prospect for such cuts in recent days.
Richard Hughes, OBR chair, said this week that the £13bn estimate in November was a “tiny” amount, given the huge uncertainty around such analysis and incoming borrowing data.
“That’s why we must stick to our plan to reduce debt by growing the economy and being responsible with spending,” the Treasury said.
