Stronger UK public finances set to increase pressure on Rishi Sunak

Rishi Sunak is poised to present much improved forecasts for the public finances in his spring statement next Wednesday, adding to pressure on the chancellor to help Britons cope with the growing cost-of-living crisis.

Very strong tax revenue growth in the financial year ending in March has already put public borrowing on course to be significantly lower than the Office for Budget Responsibility predicted at Sunak’s Budget last October.

Then, the UK fiscal watchdog said the government would borrow £183bn in 2021-22. But the government is now on course to borrow only about £160bn following much better than expected tax receipts.

The improved forecasts, while welcome in the Treasury, will intensify pressure on Sunak from Conservative and opposition MPs to increase help for households grappling with higher energy bills and surging inflation.

Column chart of Cumulative improvement in central government current receipts over Office for Budget Responsibility October forecast (£bn) showing Tax revenues are stronger than expected in 2021-22

Sir Keir Starmer, Labour leader, told the Financial Times that if Sunak chose to “sit on his hands” at the spring statement it would “send a strong signal to the British public about the lack of priority he gives to their real financial concerns”.

Tory MPs are exerting most pressure on Sunak to follow other European countries including France, Ireland and the Netherlands by cutting fuel duty, as soaring petrol and diesel prices hit households and small businesses.

“I think it’s inconceivable in these circumstances [Sunak] won’t cut fuel duty,” said Torsten Bell, chief executive of the Resolution Foundation think-tank, adding that he expected a cut of at least 5p a litre.

Sunak told Tory MPs on Monday night that crude prices had dropped 20 per cent in a week, which would have more effect than anything else on fuel prices, but his allies declined to comment on the prospect of a duty cut.

Treasury officials have in recent weeks been considering more far-reaching ways of helping households, including raising thresholds for payment of income tax or national insurance contributions.

“Rishi’s desperate to cut taxes,” said one person briefed on the Treasury’s deliberations.

However, the chancellor has also told colleagues he wants to wait if he can until the autumn before making big decisions on the cost-of-living crunch because of the volatility of world markets.

The UK energy price cap, which rises from £1,277 to £1,971 in April, will offer some protection to households until October, when it could rise further to about £3,000. At that point Sunak would almost certainly have to go beyond the £9bn relief package he outlined last month.

Treasury insiders said it would be “complicated” to explain the case for tax cuts now, when national insurance contributions are being increased by £12bn annually to fund efforts to cut record NHS waiting lists for hospital treatment as well as improve social care.

Some Tory MPs want the national insurance rise to be shelved, but Sunak and Boris Johnson have jointly committed to pressing ahead with it next month. “Rishi asks us if we don’t want to cut hospital waiting lists,” said one Tory MP, whenever the issue is raised at private meetings.

However Sunak does have more options than commonly assumed ahead of his spring statement on March 23, even if he is adamant that the event should not be seen as a full-scale Budget.

Those who follow the public finances closely expect the OBR to predict next week that the good news on tax revenues will continue, allowing the chancellor to announce he has significant fiscal firepower.

Steffan Ball, chief UK economist at Goldman Sachs and a former economic adviser to Philip Hammond when he was chancellor, said the outlook for revenue was strong.

“Employment is looking much better than it was last October, wage growth is likely to exceed 4 per cent for the whole of the year and at least some of the strong tax revenues we have been seeing are likely to persist,” he added.

Sunak’s main fiscal rule on borrowing is to ensure the public finances are on track to run a surplus on the current budget, excluding net investment, in three years’ time.

In the October Budget, the OBR’s forecasts showed Sunak was on course to have a £25bn current budget surplus in 2024-25. Ball now expects the OBR to predict that surplus to be between £45bn and £75bn, with the range reflecting the deep uncertainty over the outlook.

The OBR’s new forecasts will take account of the effects of sharply rising oil and gas prices in the first week of Russia’s invasion of Ukraine.

These are expected to push up wages and increase the cash size of the economy, known as nominal gross domestic product, thereby raising the tax revenue forecast further even though higher energy prices will depress real growth and prosperity.

Line chart of Nominal gross domestic product (£bn) showing Tax revenues have exceeded official forecasts because the economy has been bigger than expected

The OBR said at the October Budget that nominal GDP was “the key driver of tax revenues” and in its forecasts it underestimated its strength so far in 2021-22 by more than £40bn, helping to explain why tax revenues have been so strong.

Aides to the chancellor have acknowledged the OBR forecasts will be stronger in the spring statement than many commentators have expected.

Bell said there was likely to be a significant upgrade to the forecasts. “The economy is tax richer, reflecting higher wages, higher inflation and a bigger economy, but it is uncertain how much of these gains last and how much needs to be spent [by the chancellor] to deal with the problems that high inflation has brought,” he added.

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