UK Chancellor of the Exchequer Jeremy Hunt will have almost £100 billion ($119 billion) for giveaways in next week’s budget, a top economic forecaster said in a uniquely optimistic outlook.
(Bloomberg) — UK Chancellor of the Exchequer Jeremy Hunt will have almost £100 billion ($119 billion) for giveaways in next week’s budget, a top economic forecaster said in a uniquely optimistic outlook.
The projection by the National Institute of Economic and Social Research makes it a massive outlier, with most forecasters expecting Hunt to have little more than the £9 billion headroom in November’s autumn statement. The government has suggested there is no fiscal room for big giveaways.
The figures would give Hunt unexpected room to grant business tax cuts, public-sector pay rises and cost-of-living support, each of which could help revive the popularity of the ruling Conservative Party. The researcher says an inflation-linked windfall is likely to open opportunities for the Treasury.
Stephen Millard, NIESR’s deputy director for macroeconomics, said his outlook differed from others principally because he expects inflation to prove persistent and, despite higher prices, that neither the Bank of England nor markets will respond by driving up borrowing costs.
On NIESR’s forecasts, inflation doesn’t return to the 2% target for more than two years. That’s a sharp contrast with the outlook from the Office for Budget Responsibility, the government’s spending watchdog, which in November expected inflation to be below zero by the middle of next year.
NIESR’s higher inflation outlook will boost the cash size of the economy, generating billions more in tax revenue and shrinking the national debt in relative terms. That will give Hunt £166 billion of headroom against his rule that the deficit is below 3% of GDP in 2027-28 and £97.5 billion on the vow to ensure debt is falling as a share of output.
Millard, a former Bank of England economist, described the effect as an “inflation tax” but acknowledged that his assumptions were “very uncertain.” NIESR is one of the very few forecasting bodies not expecting the economy to contract this year.
“Inflation could come down very quickly and that would make a big difference to our forecast and the amount of fiscal space available,” Millard said. “But inflation coming down over two years or so is the right space to be in. I don’t think the monetary policy committee would want inflation to be coming down faster if it meant a worse recession.”
Hunt should use his windfall to reduce the planned rise in corporation tax, increase public investment, lift public sector wages in line with the private sector and help households with high energy bills, NIESR said.
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