The Chancellor is under pressure to make a pivot on the corporation tax increase
According to one of Britain’s most respected economic think tanks, Jeremy Hunt will have 166bn of headroom for cutting taxes and investing in the Budget next week.
This figure is nine times higher than the prediction of the official spending watchdog in Nov. It reflects the economic recovery after record tax receipts and sharp falls in energy prices.
The National Institute for Economic and Social Research, which did the research, advised the Chancellor that he use this time to reconsider a planned corporate tax increase from 19pc to 25% in the face of backlash from politicians and business leaders.
Although Mr Hunt insists that the increase must be made, business leaders and Tory backbenchers worry it will slow down Britain’s recovery and harm the country’s standing with international investors.
OBR stated that Hunt would reach a secondary debt target with 9.2bn headroom. Niesr anticipates that this will be 10x larger at 97.5bn.
Sources in Treasury refuted Niesr’s figures last night, suggesting that the fiscal headroom hadn’t changed at PS9bn despite a decline in the UK’s long term growth prospects.
According to a Treasury source, “Officials believe they have the decimal point at the wrong spot.”
Analysts seized upon the numbers to suggest that the Chancellor has the ability to make ambitious tax changes in order to support the economy.
Chief economist at Vanguard Europe’s investment manager, Jumana Saleheen stated that more fiscal space should be used to support long-term growth.
She stated that investors are selling UK assets to reduce their risk of losing productivity and Covid scarring. People have quit the workforce, and they aren’t returning.”
Niesr’s predictions are in sharp contrast to forecasts made by the Office for Budget Responsibility in Mr Hunt’s Autumn Statement 2022.
The Chancellor used its predictions in the aftermath Liz Truss’s disastrous mini-Budget to justify a huge tax raid on workers, and businesses.
OBR stated that even though Mr Hunt had lifted the tax burden to its highest level since WWII, would still not meet his target of bringing borrowing below 3pc GDP by 2027-28. With 18.6bn left, he could still achieve the goal to reduce borrowing to less than 3pc. Niesr expects him to have 166bn in headroom.
As the fiscal outlook improves, pressure is mounting on Treasury to reduce taxes.
Both business leaders and the Conservative Party’s free market wing have repeatedly warned that April’s planned increase in corporation tax will harm investment.
The economy outlook has improved dramatically after Mr Hunt’s Autumn Statement, and the OBR’s last forecast. This is mainly due to a steep fall in energy costs, which dropped by about two-thirds following a mild winter.
Katharine Neiss is the chief European economist at PGIM fixed income, Prudential Financial’s asset management arm. She stated: “The bottom line was that growth has come in a lot more than people expected.”
However, she cautioned that the UK is facing major headwinds following the US Inflation Reduction Act. This package, worth $369bn (310bn), of tax credits, subsidies, and tax credits for green technology companies, has been compared to what the EU is trying.
Ms Neiss stated that the UK’s ambitions to be a green tech hub will be more difficult when two large economic regions are investing in this.
Stephen Millard is Niesr’s deputy Director for Macroeconomics and asked for Mr Hunt to declare that corporation tax would rise by less than what is currently proposed. He stated that the planned increases in corporation tax would have a huge, big, and big impact on trends output.
The OBR and Niesr forecasts differ partly because Niesr anticipates that inflation will be higher than OBR expects. However, it will remain above the Bank of England target rate of 2pc over the next three year. This would lead to a higher nominal GDP, higher taxes and a decrease in the Government’s debt obligations.
Niesr’s calculations assumed that there would be no changes in tax rates or spending. Millard stated that he suspects that the tax take will decrease and therefore, the headroom will be less.