By William Schomberg and David Milliken
LONDON (Reuters) – British finance minister Jeremy Hunt will change gear next week to focus on boosting growth ahead of an expected 2024 election, after a sharp drop in inflation allowed him to declare victory on one of Prime Minister Rishi Sunak’s main policy goals.
Hunt looks set looks set to trim taxes for voters and businesses in his Nov. 22 budget update, offering a bit of relief to the many Conservative lawmakers who are alarmed at the opposition Labour Party’s big lead in opinion polls.
Annual inflation tumbled to 4.6% in October from 6.7% a month earlier, largely reflecting the effect of changes to regulated energy prices a year earlier. The drop puts Sunak on track to meet a pledge of halving inflation over 2023.
“Now we are beginning to win the battle against inflation, we can move onto the next part of our economic plan, which is the long-term growth of the British economy,” Hunt said.
He said his Autumn Statement would be centred around growth measures and speeding up the economy from its near-zero growth path outlined this month by the BoE.
But his options appear limited with the public finances still reeling from the huge shocks of the coronavirus pandemic and last year’s surge in energy prices, both of which triggered massive state spending.
Britain’s public debt now stands at close to 100% of economic output, more than three times its size 20 years ago, and the sharp climb in interest rates over the past two years has sent the government’s debt interest bill soaring.
After last year’s “mini-budget” meltdown in financial markets – when bond investors took fright at the sweeping tax cut plans of former prime minister Liz Truss – Hunt and Sunak are likely to move warily.
Analysts say they do have a bit more fiscal room for manoeuvre than thought until recently.
But the big picture – as for many rich economies around the world – will remain one of slower economic growth than was the norm before the global financial crisis of 2007-09 and mounting demands on public spending, from defence and health to pensions.
While the Labour Party is promising to accelerate the economy if it wins power, its plans – at least so far – do not look significantly different from those of Sunak’s Conservatives, with a focus on keeping fiscal discipline.
“I think it’s pretty clear it’s going to be a very hard time for anyone to be chancellor over the next few years,” Carl Emmerson, deputy director of the Institute for Fiscal Studies, an independent think tank, said.
BIG TAX RISES
The current government is on course to have raised taxes by the most since World War Two, according to the IFS, upsetting Conservative Party members who see themselves as Britain’s low-tax, pro-business party.
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Hunt has ruled out big tax cuts next week but media have said he is considering raising the threshold at which individuals pay inheritance tax, a potentially popular move for Conservative voters even if many are unlikely to have to pay it.
Hunt has also hinted that he will come up with fresh incentives for businesses to invest.
Employers want a more permanent system of incentives to encourage more business investment which could help to soften a sharp rise in corporation tax, but a one-year extension to an existing tax break is seen as most likely for now.
“What we really need in corporation tax is a bit of a strategy and to try and get back to an environment where we’re able to give businesses a bit more certainty,” Emmerson at the IFS think tank said.
George Buckley, an economist with Nomura, said Hunt would probably relax his grip on the public finances only partially at this stage with an election still probably a year away.
“Mr Hunt will undoubtedly want to keep some of his powder dry ahead of next spring’s budget – which may be a more opportune time to win over voters ahead of a possible autumn 2024 election,” Buckley said.
