The chancellor might have a little bit of wriggle room, but not much.
Chancellor of the Exchequer, Jeremy Hunt, might have a little bit of wriggle room in his Spring 2023 Budget, but not much. The sharp fall in wholesale energy prices means the cost of the energy price guarantee (EPG) has been about half that expected. This has helped government borrowing to come in much lower than the Office for Budget Responsibility (OBR) expected back in November. However, we think the OBR is set to downgrade its growth forecasts substantially for the latter part of the forecast period, which will severely limit the chancellor’s ability to increase spending and still meet his fiscal target of getting debt falling within five years.
The OBR will therefore give with one hand but take with the other.
Public sector net borrowing will be a little under £40bn lower this year and next, relative to the forecast from the OBR in November, which predominantly reflects lower debt interest payments and stronger receipts.
What’s more, the economy has turned out to be much more resilient than expected in November. As a result, the OBR should be able to revise up its forecast for growth in GDP in 2023 to about -0.5%, from -1.4% in the 2022 Autumn Statement. This should reduce its forecast for public borrowing in 2023/24 by about £13bn.
All this means that the OBR forecast for borrowing in 2023/24 will probably be around £110bn, significantly lower than the £140bn it forecast in November.
However, the OBR is likely to downgrade its medium-term view of trend productivity growth, reflecting its recent finding that it has been significantly too optimistic about medium-term growth on average. This will significantly increase the borrowing estimates after 2023/24.
The key question is which of these effects will win out in five years’ time (the horizon by which debt must be falling). We think the two effects will largely offset each other meaning that the chancellor probably won’t have much more cash to spend now than he did in November. As a result, it’s no surprise that Mr Hunt has been downplaying stories that he will cut taxes.
With this backdrop, we expect the chancellor to make several key tax-related announcements. We expect him to:
announce whether the government intends to merge the current research and development tax reliefs into a single scheme;
provide further details of a domestic minimum top-up tax to apply to very large businesses to ensure their effective tax rate in the UK is at least 15%;
provide further detail on the proposed investment zones scheme, including the geographical areas selected and the tax reliefs that will be available for businesses operating in the zones;
confirm reforms to creative sector tax reliefs, including merging the current film and TV tax reliefs into a single scheme and restricting the availability of relief for European Economic Area expenditure for video games developers;
confirm changes to transfer pricing record keeping requirements;
confirm technical changes to asset holding company regime;
increase the money purchase pension contributions allowance for existing pensioners;
announce a consultation on potential changes to the tax rules affecting hybrid and distance working;
announce measures in connection with NICs to encourage the over 50s to return to or remain in the workforce;
announce various measures to incentivise parents of young children to return to work, which may include extending free childcare to children under the age of three;
announce the outcome of the consultation on the VAT treatment of fund management services;
announce reform of the mixed property and multiple dwellings relief stamp duty land tax rules;
confirm changes to the rules on sovereign immunity from direct taxes.
The chancellor may also:
announce reforms to the capital allowances regime, which provides relief for capital investments made by businesses;
announce the next steps for making tax digital for corporation tax;
uplift or otherwise adjust the pension contributions annual allowance and/or lifetime allowance;
uplift the high income child benefit charge threshold;
issue a consultation on the beneficial personal tax regime for non-UK domiciled individuals;
announce various possible changes to capital taxes on individuals, including inheritance tax, capital gains tax and the interaction of these taxes, especially on an individual’s death;
announce details of changes to the taxation of decentralised finance;
uprate employment-related expense allowances and deductions to ensure the tax system reflects the costs to employees of such expenditure
remove the distinction between employer paid/provided and reimbursed benefits-in-kind;
announce the outcome of the review of the taxation treatment of electric vehicle charging and the government’s next steps;
announce a second phase of formal consultation on changes to the VAT land exemption.
The chancellor might have a little bit of wriggle room, but not much.
Chancellor of the Exchequer, Jeremy Hunt, might have a little bit of wriggle room in his Spring 2023 Budget, but not much. The sharp fall in wholesale energy prices means the cost of the energy price guarantee (EPG) has been about half that expected. This has helped government borrowing to come in much lower than the Office for Budget Responsibility (OBR) expected back in November. However, we think the OBR is set to downgrade its growth forecasts substantially for the latter part of the forecast period, which will severely limit the chancellor’s ability to increase spending and still meet his fiscal target of getting debt falling within five years.
The OBR will therefore give with one hand but take with the other.
Public sector net borrowing will be a little under £40bn lower this year and next, relative to the forecast from the OBR in November, which predominantly reflects lower debt interest payments and stronger receipts.
What’s more, the economy has turned out to be much more resilient than expected in November. As a result, the OBR should be able to revise up its forecast for growth in GDP in 2023 to about -0.5%, from -1.4% in the 2022 Autumn Statement. This should reduce its forecast for public borrowing in 2023/24 by about £13bn.
All this means that the OBR forecast for borrowing in 2023/24 will probably be around £110bn, significantly lower than the £140bn it forecast in November.
However, the OBR is likely to downgrade its medium-term view of trend productivity growth, reflecting its recent finding that it has been significantly too optimistic about medium-term growth on average. This will significantly increase the borrowing estimates after 2023/24.
The key question is which of these effects will win out in five years’ time (the horizon by which debt must be falling). We think the two effects will largely offset each other meaning that the chancellor probably won’t have much more cash to spend now than he did in November. As a result, it’s no surprise that Mr Hunt has been downplaying stories that he will cut taxes.
With this backdrop, we expect the chancellor to make several key tax-related announcements. We expect him to:
announce whether the government intends to merge the current research and development tax reliefs into a single scheme;
provide further details of a domestic minimum top-up tax to apply to very large businesses to ensure their effective tax rate in the UK is at least 15%;
provide further detail on the proposed investment zones scheme, including the geographical areas selected and the tax reliefs that will be available for businesses operating in the zones;
confirm reforms to creative sector tax reliefs, including merging the current film and TV tax reliefs into a single scheme and restricting the availability of relief for European Economic Area expenditure for video games developers;
confirm changes to transfer pricing record keeping requirements;
confirm technical changes to asset holding company regime;
increase the money purchase pension contributions allowance for existing pensioners;
announce a consultation on potential changes to the tax rules affecting hybrid and distance working;
announce measures in connection with NICs to encourage the over 50s to return to or remain in the workforce;
announce various measures to incentivise parents of young children to return to work, which may include extending free childcare to children under the age of three;
announce the outcome of the consultation on the VAT treatment of fund management services;
announce reform of the mixed property and multiple dwellings relief stamp duty land tax rules;
confirm changes to the rules on sovereign immunity from direct taxes.
The chancellor may also:
announce reforms to the capital allowances regime, which provides relief for capital investments made by businesses;
announce the next steps for making tax digital for corporation tax;
uplift or otherwise adjust the pension contributions annual allowance and/or lifetime allowance;
uplift the high income child benefit charge threshold;
issue a consultation on the beneficial personal tax regime for non-UK domiciled individuals;
announce various possible changes to capital taxes on individuals, including inheritance tax, capital gains tax and the interaction of these taxes, especially on an individual’s death;
announce details of changes to the taxation of decentralised finance;
uprate employment-related expense allowances and deductions to ensure the tax system reflects the costs to employees of such expenditure
remove the distinction between employer paid/provided and reimbursed benefits-in-kind;
announce the outcome of the review of the taxation treatment of electric vehicle charging and the government’s next steps;
announce a second phase of formal consultation on changes to the VAT land exemption.
