(Bloomberg) — The Treasury is telling ministers that Chancellor Jeremy Hunt is expected to have limited money for giveaways in his upcoming budget, signaling caution as members of the ruling Conservative Party push for tax cuts ahead of a general election.
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Internal Treasury analysis shared with officials in recent days estimates that Hunt will have just £14 billion ($17.8 billion) of headroom when making his tax and spending decisions, according to a person familiar with the matter. That figure remains near historic lows, and is far less than some economists had projected. Bloomberg Economics, for instance, forecast headroom of between £17 billion and £25 billion.
Better tax receipts and lower debt-interest costs in December had boosted expectations that Hunt would have more room for giveaways in March. However, the Treasury’s internal estimate predicts that the position will worsen due to poorer market conditions in recent weeks — traders have scaled back expectations of how far the Bank of England will cut interest rates this year — and lower inflation dragging down tax receipts.
As of December, the Treasury had estimated that Hunt’s headroom was £26.1 billion. It now expects the figure to be £12.1 billion lower by the time of the budget due to the downgrading factors. It added there was further potential “downside risk” in judgments from the Office for Budget Responsibility.
UK bonds are suffering one of their worst starts to the year on record, with an index that tracks their performance down almost 4% this month. The yield on 10-year gilts has risen more than 50 basis points since reaching an eight-month low in December and is now hovering around 4%.
The cautious approach show the difficult balancing act that Hunt’s likely to face on March 6. With the Tories trailing far behind the Labour opposition in opinion polls, Hunt is under significant pressure from his own party to deliver voter-pleasing tax cuts before an election that Prime Minister Rishi Sunak has said will be held in the second half of the year. The chancellor has said he wants to cut taxes further, but only if the public finances allow.
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“We have taken decisive action to tackle inflation and reduce debt, which is why we’re beginning to see the economy turn a corner,” the Treasury said in a statement. “While we have doubled our headroom since March, from £6.5 billion to £13 billion, it remains low by historical standards and can be wiped out by changing economic conditions. That’s why we must stick to our plan to reduce debt by growing the economy and being responsible with spending.”
The assessment isn’t necessarily a final indication of how the headroom will look by the time of the Budget. The OBR will give the Treasury its own fiscal forecasts on Jan. 30 and Feb. 14.
Ahead of the Autumn Statement in November, Hunt was judged by his fiscal watchdog to have a £30.9 billion buffer against his fiscal rule requiring debt to be falling as a share of GDP in five years. The chancellor chose to use £18 billion for giveaways including a major corporate tax break and cutting a payroll tax, leaving a margin of just under £13 billion.
–With assistance from Philip Aldrick and Aline Oyamada.
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