Sunak’s margin for UK tax cuts set to narrow with deficit jump

Bloomberg

The UK Treasury is expected to post the largest budget deficit for any January in at least 25 years, tying the hands of Chancellor Jeremy Hunt as he faces calls to cut taxes and boost public-sector pay.
In normal times, January delivers a bumper surplus as workers and companies settle their tax bills. But this year, spending is being driven higher by soaring debt costs and billions of pounds of payments to help Britons through the worst cost-of-living crisis in generations.
Economists are expecting a deficit of about £8 billion ($9.6 billion), the most since the month was first recorded in 1998. In a further blow to Prime Minister Rishi Sunak, the national debt is set to come within a whisker or even equal the size of the economy for the first time since the early 1960s.
The figures will provide the final snapshot of the public finances before Hunt delivers his budget on March 15 against a backdrop of economic stagnation, industrial unrest and mounting despair among ruling Conservative Party lawmakers about their electoral fortunes.
With little room for giveaways, tensions are growing between Hunt and Tories who say big tax cuts are needed to help struggling families, rev up the economy and stave off a crushing defeat in a general election that’s less than two years away.
The chancellor is also under pressure from public-sector workers from nurses and teachers to civil servants, who are waging strikes on a scale not seen since the 1980s to demand their pay keeps up with double-digit inflation.
Hunt has remained defiant, ruling out significant tax cuts before local elections in the spring and refusing to bow to union
demands on pay. He insists his priority is delivering on a government pledge to cut inflation in half this year.
“Our best guess is that Hunt’s Budget policy package will be fiscally neutral, though we see a risk he opts to loosen policy in the near term to reduce the risk of underperformance against
G-7 peers in 2023. Further out, a likely supply downgrade from the OBR may mean he finds himself pencilling more austerity to balance the books.”
Inflation is hammering not just consumers, but the public finances too. Of the £2.1 trillion of government bonds in circulation, around a quarter pay an interest rate pegged to the Retail Prices Index, which has surged more than 13% over the past year.
Debt costs have jumped more than 60% over the past year. The Office for Budget Responsibility forecasts them to reach an unprecedented £116 billion in 2022-23.
That’s more than the annual budgets of any government
department aside from the
National Health Service and almost triple the amount spent on defense.
The Treasury is also counting the cost of the tens of billions of pounds being spent to shield households and businesses from the surge in energy prices
triggered by Russia invading Ukraine.
Less than a year ago, the budget deficit was expected to drop below £100 billion in 2022-23 as the economy continued its recovery from the pandemic. Instead, it’s heading for £170 billion and the biggest share of the economy outside of the pandemic since 2012-13.
The government’s need for cash is swelling at a time when the Bank of England is asking investors to buy about £45 billion of gilts from its quantitative-easing portfolio this year.
In the short-term, Hunt can count on some positive developments since the OBR reported in November. A lower profile for interest rates and gas prices, and the prospect of a shallower recession than previously thought, should deliver valuable savings and boost taxes in the coming fiscal year.