JP Morgan says that Jeremy Hunt can cut taxes by up to £10bn in the Autumn Statement next week, as the outlook of the economy improves while inflation slows down.
Allan Monks is an economist with JP Morgan. He said that he expected the Government to borrow about £100bn in this financial year. This is down from the £132bn predicted by the Office for Budget Responsibility during the Budget presentation in March.
As a percentage of GDP, Mr Hunt will have around £26.5bn in headroom to reach his goal of reducing the national debt by five years.
Mr Monks stated that some of the financial power could be used to offer a tax cut of between £5bn to £10bn. That is equivalent to removing 1p from the basic rate and higher rates of income tax.
He said: “The government will want to gain political momentum in advance of an election that is likely next year.
It could do this by trying to influence a tax change towards a better economic supply or by announcing policies that are voter-friendly and come at a low price.
He said that tax and spending reforms to attract more people into the workforce could be considered.
It is possible that Mr Hunt will wait until next year’s Budget, when the elections are closer, to reveal any further improvements in the economic background.
Mr Monks said: “The Chancellor should instead reserve some space to implement a further fiscal ease next spring, when inflation will likely have further fallen.”
The Chancellor argued that tax cuts should not lead to inflation, because the Government is focused on meeting its commitment to reduce the rate of price increases by half this year.
The Chancellor may be able to reduce taxes if the inflation rate in October drops to 4.6pc from 10.5pc by the end of 2022.
Matthew Swannell is an economist at BNPParibas. He said that if the government’s inflation target was met, “this” could lead to policy announcements which would have a positive impact on growth.
Even if the Chancellor keeps his powder dry, it’s possible that updated projections from the Office for Budget Responsibility show that the Government has some fiscal room, which could increase the risk that pre-election giveaways will be made at the Spring Budget.
A spokesperson for HM Treasury said: “We’re committed to reducing the debt over the long term – but at the Spring Statement, our fiscal headroom was £6.5 billion. This is a quarter of what Chancellors typically have since the OBR began.
The Autumn Statement will be a focus on how to unlock investment and put people back to work in order to deliver the growth that our country needs.