Friday, March 29

Fiscal Windfall Set to Help Sunak Relieve UK’s Energy Crunch


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UK Chancellor of the Exchequer Rishi Sunak has more than enough room to protect households from a sharp rise in energy bills in April and still cut taxes before the next general election, official forecasts are expected to show.

The Office for Budget Responsibility updates its outlook on March 23, just days before a payroll tax hike and a 50% increase in energy bills in April that will together add about 1,200 pounds ($1,630) to the cost of living for a typical British household.

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In October, the fiscal watchdog predicted Sunak would meet his debt-reduction rule with more than 17 billion pounds to spare. Developments since then suggest he’s on track to do so with even more headroom. That would give the Treasury enough firepower to help people through the immediate energy crunch and to lower the tax burden, which is approaching a 70-year high.

“The OBR is not going to reduce his headroom, and there are reasonable grounds to believe it will make it larger,” said Andrew Goodwin, chief UK economist at Oxford Economics.

Forecasts from Oxford Economics, which does macroeconomic modeling for the EY Item Club, suggest the government will have about 5 billion pounds more than thought in both the current fiscal year and 2022-2023, despite rocketing inflation and higher debt-servicing costs.

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In 2024-25, when his fiscal rules bite, Sunak will have at least 12 billion pounds extra against his target to have debt falling as a share of gross domestic product, it said. That gives him an opportunity to cut taxes before the election, which must be held by the end of 2024.

Bloomberg Economics, Deutsche Bank and Capital Economics agreed that the OBR’s March forecasts are likely to give him more headroom in 2024-25 than previously thought. However, they believe that higher-than-expected inflation and interest rates will cause a temporary worsening of the budget deficit in 2022-23.

On Friday, Business Secretary Kwasi Kwarteng signaled that government help is on the way. He told the BBC he was confident it will “mitigate the impact of substantially higher bills” but that an announcement was unlikely before the spring statement.

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Labour has proposed a 6.5 billion-pound one-off package of support for this year. The chancellor is expected to come up with proposals for households and businesses costing at least as much.

Dan Hanson, senior UK economist at Bloomberg Economics, said the March statement might be an opportunity for Sunak to set out his stall as a Conservative leadership contender.

With Prime Minister Boris Johnson’s future in doubt following reports of lockdown rule-breaking at his Downing Street office, Sunak has an opportunity to appeal to the party faithful by cutting taxes before any contest begins.

“I can see him using his statement as a pitch for prime minister, putting both help for households, tax cuts and healthy public finances front and center,” Hanson said.

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The chancellor’s current plans will see the UK tax burden rise to the highest level since Clement Attlee’s Labour government in 1950, a comparison he is known to deploy.

The improved outlook for the public finances reflects upward revisions to official estimates of past growth and lower borrowing outturns in 2021. Oxford Economics estimates that borrowing will be lower than forecast by 9 billion pounds this year and 4 billion pounds in 2022-23, which starts in April.

Bloomberg Economics, Deutsche Bank and Capital Economics differ in their outlook for next year, when they expect higher inflation and interest rates to add as much as 20 billion pounds to borrowing. All agree the impact will be short-lived and borrowing will fall sharply as inflation retreats.

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That will give Sunak a windfall of 12 billion to 25 billion pounds, on top of the 17 billion pounds of headroom the OBR had already predicted for 2024-25.

At Deutsche Bank, Chief UK Economist Sanjay Raja said that “despite factors that could push up borrowing in the coming fiscal year, it’s fair to think he can do a little more to help offset the cost of living crisis, while also thinking about cutting taxes down the line and still meet his targets.”

The opposition Labour Party has proposed scrapping value-added tax on energy bills for a year and expanding the Warm Home Discount program, at a cost of around 6.5 billion pounds.

The Institute for Fiscal Studies has recommended a one-off compensating increase in welfare benefits and the state pension at a cost of 4.5 billion pounds.

©2022 Bloomberg LP

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