Extra fiscal headroom resulting from higher inflation will not provide any space for tax cuts, according to a report by the Resolution Foundation. The report, released today, comes ahead of British Finance Minister Jeremy Hunt’s Autumn Statement on November 22. Hunt has faced pressure from members of his Conservative party to reduce taxes before the expected national election next year. However, the government has cited the aim of halving inflation and rising debt servicing costs as reasons for not being able to implement tax cuts.
The Resolution Foundation’s analysis indicates that higher tax receipts and lower borrowing, both due to sticky inflation, would increase Britain’s fiscal headroom by £13 billion ($16.09 billion). However, the report argues that this increase is based on “implausible” public spending plans. James Smith, research director at the Resolution Foundation, stated that this illusion of extra fiscal flexibility is founded on the idea that higher inflation will boost tax revenues without causing an increase in spending on public services.
The Bank of England predicts that Britain’s high inflation will only return to its 2% target by the end of 2025, approximately six months later than previously forecasted. This elevated inflation is already impacting public spending. The Resolution Foundation highlights that recently agreed public sector pay settlements would absorb the fiscal headroom, but government plans have not been adjusted to reflect this. The think tank also warns that public spending will need to increase beyond current projections in order to safeguard the budgets of certain ministries in real terms over the coming years.
James Smith emphasized that it is becoming increasingly evident that the spending plans outlined for after the next election will not be achievable. These findings call into question the feasibility of implementing significant tax cuts, as some members of the Conservative party have been advocating for. With the Autumn Statement just a few weeks away, all eyes will be on Finance Minister Jeremy Hunt as he presents the government’s fiscal update.
More detail via Malay Mail here… ( Image via Malay Mail )