Will there be a rabbit from the hat at Spring Budget?

The Budget has a few traditions, from the Chancellor of the Exchequer setting off from 11 Downing Street with their red Budget box to the availability of alcohol at the despatch box during the speech. One tradition favoured by some Chancellors has been to pull the proverbial rabbit from the hat with a surprise announcement.

Although Chancellor Jeremy Hunt has played down the chances of this happening on 15 March, improved economic and fiscal news has prompted many to push for their favoured measures to be included in this year’s Spring Budget.

 

Surprise surplus

Hopes that the Chancellor now has the fiscal headroom to increase spending or cut taxes were boosted by recent data on public borrowing and the economy.

Public borrowing in the financial year to date is £30.6 billion less than predicted by the Office for Budget Responsibility (OBR). The Office for National Statistics (ONS) reported a £5.4 billion surplus for the Chancellor in January – aided by self assessment income tax receipts of £21.9 billion, the highest January figure since monthly records began in 1999.

In addition, news that the economy flatlined in December rather than shrinking as expected may mean Mr Hunt finds there are higher tax revenues at his disposal when he considers the options for the Budget.

In response to these numbers, critics have urged Mr Hunt to find more money for the NHS; fund higher public sector pay settlements; extend the current level of the energy support scheme beyond March; and scrap the planned rise in corporation tax.

 

Energy bills

As it stands, the Energy Price Guarantee (EPG) is set to rise by 20% in April, pushing a typical household bill up to £3,000 per year from £2,500.

Although the energy regulator Ofgem recently cut its price cap by around £1,000 per year to £3,280, bills would still be set by the EPG, as it is lower. Ofgem’s price cap is forecast to drop below the price guarantee in July as a result of falling wholesale energy costs.

This has led consumer champion Martin Lewis to predict that there’s a more than 50% chance that the UK government will abandon plans to raise energy bills in April. Mr Lewis argues that increasing prices for three months would be an ‘act of national mental health harm’.

In addition, economists estimate that the EPG is now likely to cost only around half of the OBR’s £12.8 billion forecast in 2023/24, thanks to lower wholesale energy prices.

 

Breaking the deadlock on strikes

The improvement in the public purse could also tempt the Chancellor to offer a pay increase to public sector workers as part of his Budget to help prevent another wave of damaging strikes.

Paul Nowak, the General Secretary of the Trades Union Congress (TUC), said the figures showed the government was ‘running out of excuses’.

Mr Nowak said:

Jeremy Hunt must come out of hiding and help break the deadlock on public sector pay. After 13 years of pay cuts and pay freezes nurses, teachers and millions of other public servants are at breaking point.

If ministers don’t provide a fair pay settlement, the staffing shortages crippling our schools, hospitals and other frontline services will just get worse.

 

Predecessor pressure

The calls for the Chancellor to reverse plans for a rise in corporation tax this April have been led by those in his own party.

Three of his predecessors, George Osborne, Philip Hammond and Kwasi Kwarteng have led calls for the plan to increase the rate of corporation tax from 19p to 25p to be scrapped.

In addition, former Home Secretary Priti Patel wrote in a newspaper article that the Chancellor could send a positive signal to business by cancelling the increase.

 

Tough choices

So far Mr Hunt has stuck to his guns and ignored the calls being made despite the surplus now available to him.

In a statement, the Chancellor said:

We are rightly spending billions now to support households and businesses with the impacts of rising prices – but with debt at the highest level since the 1960s, it is vital we stick to our plan to reduce debt over the medium term.

Getting debt down will require some tough choices, but it is crucial to reduce the amount spent on debt interest so we can protect our public services.

However, the combination of fiscal wiggle room, mounting pressure and the need to revive his party’s fortunes in the polls may just tempt Mr Hunt to pull a rabbit from his hat at the Spring Budget.

 

Spring Budget

The Chancellor will deliver the Spring Budget, alongside a forecast from the independent Office for Budget Responsibility (OBR), on 15 March.

 

Mercia’s tax experts will be watching and will provide detailed analysis of the day’s announcements. Keep your clients up to date with our range of digital products.