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Evening Standard
Evening Standard
Business
Daniel O'Boyle

Chancellor has 'headroom' for £15bn worth or tax cuts of new spending at Autumn Statement, analysis finds

The Chancellor has enough headroom to make £15 billion of tax cuts or spending increases during next week’s Autumn Statement and still meet his targets on debt, new analysis today has found.

But with most of that sum almost certain to go towards continuing extending relief policies, it is unlikely to mean major giveaways are coming.

The cost of Jeremy Hunt’s tax and spending policies are based on OBR forecasts. But since the last set of forecasts, inflation has proved “stickier” than expected and interest rates on government bonds have risen higher than thought in response.

Higher bond rates gives the Government less wiggle room, as each pound of debt becomes more expensive. But higher inflation, while tax thresholds remain frozen, means more people paying higher trates of tax, boosting the amount of funds in Government coffers. Experts have said that recent threshold freezes are the equivalent of the biggest tax raid in a century.

James Smith, developed markets economist at Dutch bank ING, said: “When we wrap all of that together and plug our own inflation/wage forecasts into the OBR’s ‘ready reckoner’ model, those extra revenues outweigh the negative impact of higher interest rates and inflation on spending.”

Overall, the changes give Hunt an extra £15 billion to play with. That would be enough to both abolish the inheritance tax and shave 1% off the basic rate of income tax.

But the OBR models being used assume that a number of temporary schemes will expire this year. That includes the “full expensing” of capital expenditures against corporation tax and the 5p cut to fuel duty, as well as the pause on inflation-linked rises in the duty.

It is widely believed that these policies will be extended and made permanent. 

Full expensing alone could cost as much as £10 billion.

Smith said: “The margin for error is still tight and doesn't offer much space to make major policy changes this month.”

Tim Sarson, KPMG UK Head of Tax Policy, said: “In line with the general economic outlook, the Autumn Statement might be a similarly dour affair. The money tree is looking distinctly bare.  Nevertheless, recent official figures showed that Government borrowing over the last six months has been lower than predicted.  This may strengthen the calls for tax cuts over the coming weeks. 

“We think vote pleasing tax cuts will be saved for the Spring, and that the Autumn Statement will be largely focussed on business.  This doesn’t mean the Chancellor won’t start to warm up his audience by trailing what he hopes to do in a Spring pre-election give-away to disenfranchised voters still struggling with the cost of living.

“While we expect rather limited changes to most areas of business taxation, we think the Government won’t be able to resist one or two colourful announcements - and don’t rule out surprises out of leftfield either.”

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