The general election is coming up and Labor is more than 15 points ahead of the Conservatives in the polls.
While some Tories may have given up hope, others are hard at work on tax cuts to revitalize the Conservative Party.
Calls for tax cuts have so far been ignored by the Treasury Department, but momentum is growing after the Tuesday it turned out that the government does not borrow as much as feared.
Chancellor Jeremy Hunt may be far from getting public finances back on track, but they are certainly a lot better than the bleak forecast for March.
The government has borrowed $56.6bn this fiscal year so far pounds. This is £13.7bn more than in the same period in 2022, according to the Office for National Statistics.
But, crucially, this is £11.3bn less than the Office of Accountability's forecast (OBR). Hunt budget time in March.
Rampant inflation and rising wages mean that the decision to freeze income tax thresholds is forcing more workers to move into higher brackets who pay more out of their wages despite the cost-of-living crisis.
In March, the OBR noted that the so-called fiscal burden, along with lowering the cap on the top tax rate from £150,000 to £125,140, is likely to raise revenue by around £29.3bn a year.< /p>
This is equivalent to a 4 percent increase in the base income tax rate.
So, despite this increase in the treasury, why is the chancellor resisting pressure to cut taxes and ease the pressure on households and businesses?
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One of the factors is political. After last year's mini-budget fiasco, neither the Conservatives nor Labor want to look reckless with public finances.
The other is economic. While there may be some room for tax cuts based on comparisons with OBR forecasts, Hunt's focus is now on controlling inflation.
The government's main goal is to halve inflation by the end of this year, which means achieving annual price increases to about 5 percent.
The Bank of England, not the chancellor, has the main tool to bring down inflation, namely interest rates.
But given the sensitivity of the cost-of-living crisis, Hunt wants avoid any action that may aggravate the situation.
For example, lowering the income tax rate or raising thresholds to ease the burden on workers will also allow families to keep more money, which could lead to higher spending and worse inflationary pressures.
Additionally, there is a headwind in the form of the volatility of the British economy , which can reduce the budget stock at any time.
Although last month's deficit was smaller than expected, the government still borrowed more than in July 2022, and public debt is still at an uncomfortably close 100% of GDP.
2308 Net debt to GDP ratio
Cutting taxes on the back of a few good months of revenue, at a time when the global economy looks shaky, can be dangerous. In the near future, things could easily turn in the opposite direction, causing the government to be accused of recklessness.
On the positive side, OBR has hinted that some of the ongoing 2023 tax revenue growth is likely to be carried over to future years.
“The surplus compared to the March profile does suggest stronger-than-expected tax revenue growth . nominal tax bases such as wages, nominal consumer spending and profits,” the message reads.
Income tax and national insurance revenues are 4.3% above the watchdog's March forecasts, while VAT receipts are up 8%. compared to OBR forecasts, was driven by higher retail prices.
Corporate tax revenue is also £2.5bn, or 10.6%, higher than OBR's March forecast.
However, it is worth noting that monthly borrowing figures are volatile, heavily revised and often dependent on one-off factors. .
In addition, the burden on the state wallet is increasing.
While inflation has proven to be beneficial to the tax authorities, the higher interest rates imposed by the Bank of England are costly to the Treasury.
0308 Bank rate reaches 5.25 At the start of quantitative easing (QE), the government agreed to cover any losses incurred by the Bank on the bonds it bought to support the economy.
QE has created cash reserves with which the Bank pays interest at the current base rate.
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When interest rates were at record lows, interest costs were more than covered by money earned from government bonds.
Now interest rates have risen to 5.25%, above the average interest rate on securities. The bank pays out more on quantitative easing than it earns on bonds. The Treasury must pay the difference.
In July alone, £14.3bn was transferred from the Treasury to the Bank, £5.4bn above the OBR forecast. Payments for this tax year are £24.1 billion.
The Bank of England estimates that the Treasury will have to transfer £80 billion to the Bank over the next two years to cover losses.
Economists warn that the strong financial performance of recent months may not necessarily last until the end of the year.
Citi's Christian Schulz says the robust labor market performance that Treasury is participating in may not last.
< p>“The recent rise in unemployment exacerbates the downside risks to labor incomes, especially in 2024 projections,” he says. . “This, in turn, is likely to reduce the tax intensity of the activity.”
At the same time, £2.6 trillion in public debt borrowing costs are rising, says Gabriella Dickens of Pantheon Macroeconomics.< /p
Our calculations show that OBR is likely to revise its debt interest forecast by around £40bn in 2024-2025 and by around £20bn in five years if it produces equivalent forecasts , using today's market expectations for the bank rate and the current level of securities yields,” she says.
If or when inflation falls to the 2 percent target, the time for the chancellor really exists, or it was illusory in after all.
It will be an uncomfortable wait for conservatives and hard-pressed families.
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