Latest OBR forecast shows major tax cuts in the Budget are 'impossible'

Business and Economics Editor Joel Hills explains what the latest snapshot on the government's finances suggests

Something rare and extraordinary happened last month. The government spent less than it had coming in.

The “surplus” in January of £16.7 billon was the biggest on record.

Sadly, January is an exceptional month. The Treasury receives a wave of money as millions of people scramble to complete self-assessment tax returns.

The Big Picture is the government remains a big borrower.

The latest figures from the Office for National Statistics (ONS), show the government borrowed £96.6 billion in the first ten months of this financial year, which ends in March.

That’s £9.2 billion lower than the £105.8 billion the Office for Budget Responsibility (OBR), the government’s independent forecaster, was predicting just a few months ago.

On the face of it, this is encouraging news for the chancellor who is preparing to deliver a Budget in two weeks time - a Budget he hopes will revive both our economic fortunes and the Tories’ popularity.

Jeremy Hunt has said many times that he wants to cut taxes, which have risen at a record pace in the last five years, on March 6.

He has also expressed a desire to increase spending on defence (at a time when the army has recruitment problems and the world feels a more dangerous place) and on the NHS (where key service targets are being missed).

The chancellor also has the “fiscal rule” he set himself - to get Public Sector Net Debt falling as a share of National Income in five years time - which, in theory, he needs to stick to.

Jeremy Hunt’s problem, according to Treasury sources, is that on Tuesday evening the OBR handed him the latest iteration of its economic forecast for the UK which made clear he cannot possible do all of the things he wants to.

The OBR’s assessment is that gilt yields have risen in the last six weeks and with them the cost of servicing the government’s debt.

The path of inflation in the next few years is also now expected to be lower than the OBR forecast last November - this is clearly good news in one sense but it would mean that the government’s decision to freeze the tax thresholds for Income Tax and National Insurance until 2027/28 will (stealthily) raise less money.

The chancellor’s “fiscal headroom” (translation: the leeway or buffer he has within his target on debt) is apparently “broadly where it was in the Autumn Statement” - ie £13 billion.

As it stands, “major tax cuts are impossible,” a source who has seen the OBR figures told me.

Undeterred, the chancellor seems determined to press ahead with a cut to either National Insurance or Income Tax ahead of the general election.

And if headroom doesn’t exist, he is inclined to create it.

And it now looks likely that, on March 6, Hunt will attempt to put more money in people’s pockets in the run-up to the election by pencilling in further cuts to spending on public services after it.

Public services are already creaking, the existing spending plans for 2025/26 and beyond already pretty implausible. But that’s a headache for whoever forms the next government.

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