09/03/2023
With very few Budgets left to go until the next
election, which must be held by January 2025, the Chancellor will be hoping to pull more
than just a few rabbits from the hat. With the Labour Party consistently polling 20
percentage points ahead of the Conservatives, Jeremy Hunt might be thinking that even an
entire menagerie of exotic zoo animals won’t save him from joining the ever-growing pile of
ex-Chancellors of the Exchequer. That doesn’t mean he won’t try. Currently we expect he will
deliver:
- Extension of the current energy price cap by three months
The £2,500
energy price cap was due to increase from 1st April to £3,000 but now that energy
prices are falling, the government can afford to protect the consumer at a lower cost than
previously anticipated. This means the price guarantee can be extended by three months
without incurring huge extra costs to the Treasury.
- Freeze to fuel duty
Although energy prices might be falling,
consumer prices are still rising. The cost of living crisis is still with us and motorists
are always a key constituency for any government. If fuel duty were to rise in line with
inflation then the price at the pump would immediately jump up, angering drivers across the
country and hiking the cost of transportation more generally. Freezing the duty at its
current levels isn’t cheap, costing around £6bn, but it might be worth paying the price on
the balance sheet to avoid paying the price at the ballot box. Other ideas that have been
circulating and might make it into the Budget include:
- Extension of free childcare
Working parents of children aged two to
three can already receive a chunk of free childcare but there have been
suggestions
from officials at the Department of Education to extend the
age range so that more parents can benefit.
- Raising the state pension age
The current age at which someone can
receive the state pension is 66 but this is already moving up to 67 by 2028 and 68 by 2046.
Officials are considering bringing forward the deadline for the latter to the mid-2030s.
This tweak would significantly alter the profile of the future burden of state pensions. It
would also shift incentives for people as they push back their retirement plans.
- Pension allowances
On top of the change to the pension age, there is
the possibility of raising the tax-free allowance on pension pots. The so-called lifetime
allowance encourages some workers to retire early as continuing to work would drag them into
paying extra tax. This might help alleviate the large increase in “economically inactive”
people that has taken place since the pandemic struck. From this list of possibilities, one
thing is clear: they are all specific detailed policies that tinker around the edges to try
to solve the perceived problems of the economy. Rishi Sunak is a details man. He likes to
fill in his spreadsheet and get his homework done. That’s not only his natural style, it is
also the reason he came to power. He needed to restore credibility after the gung-ho style
of his predecessor. That means meeting the fiscal rules
set
out
by Jeremy Hunt in his November Budget. One of them, that debt must
be falling as a percentage of GDP by the fifth year of a five-year rolling period, is why
the Chancellor still doesn’t have as much headroom as recent data suggest. Although the
public sector
registered
a surplus in January, giving the Chancellor £30bn
more
than the Office for Budget Responsibility had forecasted in November, that doesn’t make much
of a dent in what’s happening to the economy in five years’ time. If the OBR’s new forecasts
suggest higher GDP in the next couple of years but lower in the period after that, then the
Chancellor butts up against his rule once again. Headroom disappears at the stroke of the
OBR’s pen. If the Chancellor were to ignore those forecasts then he runs the risk of losing
market credibility. That would lead to lower Gilt prices and higher interest rates which
would see all his headroom disappear down the plughole – and his career along with it, as
his predecessor found out. But he doesn’t just face the constraints imposed by the market or
by forecasters. The PM and Chancellor face a threat from inside their own party. The spectre
of tax cut agitators remains; like the Norwegian Blue, the Trussites aren’t dead, they’re
simply resting. A section of the Conservative Party doesn’t want a list of tinkering
tailored policies. They want full-blooded tax cuts upon which to sally forth into an
election campaign. So the big question is what will be done about Corporation Tax?
This is due to rise by almost a third from 19% to 25% this April. That’s a big jump at a
time when the UK wants to signal it’s open for business. It also comes at the same time as
the end of the temporary “super-deduction” rate for tax relief on capital expenditure. Rishi
Sunak introduced this measure as Chancellor in 2021 to stimulate business investment in the
wake of the pandemic but it expires at the end of this month. That’s a big wallop to
business chops. We have seen with the recent proposed changes to the Northern Ireland
Protocol that the Prime Minister can square circles to the extent they’re not visible to the
naked eye. There will be some legerdemain to quieten, if not silence, his critics.
Expect enough rabbits to at least neutralise, if not please, the baying minority mob within
his own party but not so much that the market takes fright. A guinea pig, then, with a
pretty bow on top. 
Helen Thomas
CEO of BlondeMoney