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Budget windfall should help Sunak ease UK energy crisis

Budget windfall should help Sunak ease UK energy crisis

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Britain’s Chancellor of the Exchequer Rishi Sunak has more than enough headroom to protect households from a sharp rise in energy bills in April and has cut taxes further ahead of the next general election, according to official forecasts.

The Office for Budget Responsibility updates its outlook on March 23, just days before a rise in payroll taxes and a 50% rise in energy bills in April which together will add around 1,200 pounds (1,630 $) to the cost of living of a typical British household.

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In October, the budget watchdog predicted that Sunak would meet his debt reduction rule with more than £17billion to spare. Developments since then suggest he is on track to do so with even more breathing room. This would give the Treasury enough firepower to help people through the immediate energy crisis and to reduce the tax burden, which is approaching a 70-year high.

“The OBR is not going to reduce its room for maneuver, and there are reasonable grounds to believe that it will increase it,” said Andrew Goodwin, chief UK economist at Oxford Economics.

Forecasts from Oxford Economics, which does macroeconomic modeling for the EY Item Club, suggest the government will have around £5bn more than expected in the current financial year and 2022-23, despite the surge in the inflation and rising debt servicing costs.

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In 2024-25, when his fiscal rules bite, Sunak will have at least £12bn more on hand than his target of lowering debt as a percentage of gross domestic product, he said. This gives him the opportunity to cut taxes ahead of the election, which is due to take place by the end of 2024.

Bloomberg Economics, Deutsche Bank and Capital Economics agreed that the OBR’s March forecast will likely give it more breathing room in 2024-25 than previously thought. However, they estimate that higher-than-expected inflation and interest rates will lead to a temporary worsening of the fiscal deficit in 2022-23.

On Friday, Business Secretary Kwasi Kwarteng signaled government aid was on the way. He told the BBC he was confident it would “mitigate the impact of significantly higher bills”, but that an announcement was unlikely before the spring statement.

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Labor has proposed a one-off £6.5billion support package for this year. The Chancellor is expected to present proposals for households and businesses costing at least that much.

Dan Hanson, senior UK economist at Bloomberg Economics, said the March statement could be an opportunity for Sunak to lay out his stand as a Conservative leadership candidate.

With Prime Minister Boris Johnson’s future uncertain following reports of breaches of lockdown rules in his Downing Street office, Sunak has an opportunity to appeal to party loyalists by cutting taxes before the beginning of any competition.

“I can see him using his statement as a pitch for the Prime Minister, putting both household aid, tax cuts and the health of public finances front and center,” Hanson said.

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The Chancellor’s current plans will see Britain’s tax burden rise to its highest level since Clement Attlee’s Labor government in 1950, a comparison he is known to bemoan.

The improved outlook for public finances reflects upward revisions to official estimates of past growth and lower borrowing in 2021. Oxford Economics estimates borrowing will be £9bn lower than expected this year and £4bn lower than forecast. books in 2022-23, which begins in April.

Bloomberg Economics, Deutsche Bank and Capital Economics differ in their outlook for next year, when they expect rising inflation and interest rates to add up to £20bn to borrowing. All agree that the impact will be short-lived and that borrowing will fall sharply as inflation recedes.

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This will give Sunak a windfall of £12-25bn, on top of the £17bn margin the OBR had already predicted for 2024-25.

At Deutsche Bank, UK Chief Economist Sanjay Raja said that “despite factors that could drive up borrowing in the coming financial year, it’s fair to think it can do a little more to help offset the cost of living crisis, while also thinking about lowering taxes.” all the way and always achieves its objectives.

The opposition Labor Party has proposed scrapping value added tax on energy bills for a year and extending the Warm Home Discount scheme, at a cost of around £6.5billion.

The Institute for Fiscal Studies has recommended a one-off compensatory increase in social benefits and the state pension at a cost of £4.5billion.

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