Jeremy Hunt warned not to spook markets with unfunded budget tax cuts – business live | Business

Good morning, and welcome to our rolling of business, the financial markets, and the world economy.

With just over week to go until the budget, Jeremy Hunt is being warned not to risk unfunded tax cuts that could cause ructions in the financial markets.

The chancellor is understandably keen to offer some pre-election sweeteners, in the hope of closing the gap with Labour. City economists, though, warn that there may not be as much fiscal firepower to play with as Hunt would like.

ING, the Dutch banking group, estimates that the money available for tax cuts – so-called “headroom” – now equals £18bn. That’s up from £13bn in November, but lower than estimated a few weeks ago, as the City has cut it expectations for Bank of England rate cuts.

This headroom is the amount of money the chancellor can spend, and still hit his fiscal rule – to have debt falling, as a share of GDP, in five years time.

£13bn could, potentially, allow the chancellor to cut income tax by 2p in the pound – as a 1p cut to the basic rate of income tax is slated to cost roughly £7bn/year. That wouldn’t leave very much left over, though.

As ING’s developed market economist, James Smith, puts it in a research note this week:

The situation is tight. And it’s possible our estimate of headroom is too optimistic.

What about cutting spending, though, to free up money for tax cuts? ING says such spending restraint looks “unrealistic”, given the government’s current plans already imply more painful austerity for departments.

Talk of tax cuts will revive visions of the 2022 mini-budget debacle, when Kwasi Kwarteng crashed the pound and the bond markets by announcing unfunded tax cuts, without any scrutiny from the independent Office for Budget Responsibility.

The situation is different this time – the OBR will give its verdict as soon as Hunt sits down next Wednesday after delivering the budget.

Smith says that funding tax cuts today with unrealised and potentially challenging spending cuts tomorrow may “raise a few eyebrows among investors”, but in reality this wouldn’t be a new approach.

Smith told Newsportu:

“The savings earmarked so far are already very challenging and further savings appear unrealistic.

Talk of tax cuts inevitably triggers memories of the 2022 mini budget crisis, where UK government borrowing costs rose precipitously following a package of unfunded measures designed to boost growth.”

He warns, though, that fresh tax cuts could still apply some upward pressure on yields – the measure of Britain’s borrowing costs.

ING’s gauge of risk premium in the government bond market suggests investors are still keeping an eye on UK fiscal risk – with UK borrowing costs higher than Germany’s, but in line with the US.

Sizable cuts to income tax would add further impetus for the Bank of England to keep interest rates on hold a little longer, ING predicts, meaning more pain for borrowers and a delay to rate cuts.

ING reports that market conditions in the currency market are calm, which should please Hunt.

They say:

When it comes to FX markets, current market conditions could not be more different than those that prevailed at the height of the Liz Truss debacle.

But, they warn that if the chancellor was to “misread the mood of gilt investors and cause another upset”, sterling would take a hit.

ING add:

Short-term models suggest a 2% sell-off in sterling could happen quite easily were investors to again demand a risk premium of sterling asset markets.

The Institute for Fiscal Studies are pointing out this morning that UK taxes are heading to record-high levels, as a share of national income.

They warn that the public finances face an ‘unhappy outlook’, with debt high and rising, and barely on track to start falling in five year’s time.

In a warning shot to Hunt, they say:

Unless the Chancellor is willing to spell out where the cuts will fall, the temptation to scale back provisional spending plans further to ‘pay for’ new tax cuts should be avoided.

We’ll hear more from the IFS this morning, as they present their analysis of Hunt’s options ahead of the budget.

The agenda

• 8am GMT: Kantar’s latest UK supermarket sales and market share data

• 10am GMT: Institute for Fiscal Studies presents Spring Budget 2024: the Chancellor’s options

• 1.30pm GMT: US durable goods orders for January

• 1.40pm GMT: Bank of England deputy governor Dave Ramsden gives keynote address at Association for Financial Markets in Europe’s Bond Trading, Innovation and Evolution Forum