Budget day on 15 March is less than two months away and if ever there was a government in need of a feelgood event then this is it. Unfortunately for Rishi Sunak, the state of the public finances means the chances of a voter-friendly giveaway to counter a cost of living crisis and sleaze allegations look vanishingly small.
Jeremy Hunt certainly provided no hint in his response to the latest Office for National Statistics figures that he was preparing anything other than a steady-as-she-goes package. It was vital, the chancellor said, to stick to his deficit reduction plan.
Hunt’s caution is understandable. The highest December budget deficit since modern records began in 1993 suggests the task of knocking the public finances back into shape will be no easy task, even though the picture is not quite as dismal as the headline numbers indicate.
There are things the chancellor has going for him. The £27bn-plus December deficit was £10bn more than the Office for Budget Responsibility predicted at the time of November’s autumn statement, but that was largely due to changes to the way student loans are valued.
Tax receipts were higher in December than a year earlier, while the cumulative deficit for the first eight months of the 2022-23 financial year have been revised down. Falling global gas prices, provided they are sustained, will cut the cost of the government’s energy support packages from April onwards. The financial markets are signalling a lower path for interest rates than was the case during the panic created by Kwasi Kwarteng’s mini-budget last September. The Institute for Fiscal Studies thinktank estimates debt interest payments could be £10bn a year lower as a result.
But not yet. The IFS says the benefits of smaller debt interest payments will not be felt until 2024-25. In the meantime, Hunt is under pressure to find extra cash to end the strikes in the public sector, while continuing the trend of the past decade and sticking with a fuel duty freeze for motorists will cost him £6bn.
Hunt has set targets for government borrowing and the national debt, and will not achieve them if a weaker-than-expected economy leads to lower tax receipts and higher public spending. As the IFS says, he has left himself very little wriggle room if growth disappoints. Thus far, the economy has held up a little better than the Bank of England envisaged in November, but there is no guarantee the good news will continue in the face of steadily rising interest rates and April’s increase in taxes.
A giveaway package on 15 March might help ease recession fears but it could also prompt the Bank of England into more aggressive action on interest rates. In the short term, the Treasury’s priority is to limit the extent to which Threadneedle Street feels the need to raise borrowing costs.
All that suggests that Hunt will play it long and try to make a virtue of his prudent approach. Unless there is a new unpleasant shock to the economy there will be tax cuts. But they will have to wait until the autumn or, more likely, until a pre-election budget in the spring of 2024.