Business
The economic outlook for the UK is bleak, but a landmark fiscal event such as sweeping tax cuts in March presents another problem
Grasp the nettle or wait for things to miraculously get better. This is the decision that Rishi Sunak will weigh at the next general election as the Conservatives head towards the finish line of another challenging year.
After Jeremy Hunt announced that the government would deliver an earlier-than-expected budget, with a date set for March 6, the possibility of an election in May following some election-related tax cuts appears to be under intense consideration.
On the face of it, there are few good reasons why Sunak would give the go-ahead to an election he is likely to lose. The cost of living crisis continues to weigh on households as the UK economy approaches a possible recession.
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However, the prime minister has one advantage over his rivals: the ability to change government policy to dictate the political weather. With his party lagging well behind Labor in the opinion polls, a daily budget will pose a further challenge.
Hunt is expected to use what could be the last major financial event before the election to announce a sweeping package of tax cuts, with an early March date helping to give voters as much time as possible to feel the benefits.
Less than five weeks after the November fall statement, Treasury insiders said no formal meetings had yet taken place to discuss the spring budget. However, speculation is already rife and Downing Street is reportedly keen on reducing or even scrapping inheritance tax, a policy Hunt shied away from last month.
However, there are disagreements within the Tory party over which policies should be given priority. Some prominent backbenchers are calling for income tax cuts instead of handouts that would primarily benefit the wealthiest individuals.
The government is also facing accusations that despite tax cuts announced in the spring budget, living standards are only deteriorating after 14 years of Tory rule while public services collapse.
It is highly unlikely that Hunt will announce giveaways large enough to overcome a six-year freeze on income tax thresholds first introduced by Sunak in 2021. The policy is expected to raise more than £50 billion and pull millions of workers into higher income tax brackets – helping to push total tax revenue as a share of the economy to its highest level since the late 1940s.
He will be forced by self-imposed rules to cut public debt as a percentage of GDP within five years – a requirement met by around £13 billion in the autumn statement. However, this required real government spending cuts of £20 billion after the next election – which leading economists said was unrealistic.
The Chancellor will be keen to stress that Sunak's primary target of halving inflation in 2023 has been achieved, from more than 10% at the start of the year to 3.9% in November. Annual wage growth has also risen above inflation again in recent months, helping to ease pressure on struggling households.
However, most of the Prime Minister's other goals are in danger of being missed. And even as inflation declines, the cost of living remains elevated after its sharpest increase in decades.
With economic growth near stagnation, persistent inflation and higher taxes, the Resolution Foundation expects the current Parliament to be the first in modern history where living standards have fallen – with the average household expected to be £1,900 worse off will be.
In 2024, the economy is expected to experience minimal growth at best, with the Bank of England predicting a 50-50 chance of a recession. Although inflation has fallen in recent months, the central bank argues that interest rates must remain high to maintain pressure on households and businesses from high borrowing costs.
Passing an early spring budget could shorten the time before the economic outlook deteriorates further and give Hunt leeway in public finances to offer tax cuts. But against such a challenging backdrop, even a campaign budget could struggle to prepare Sunak for electoral success.
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