LONDON (Reuters) – Extra fiscal headroom as a result of higher inflation is illusory and will not give any space for tax cuts when British Finance Minister Jeremy Hunt gives a fiscal update later this month, a think tank report said on Monday.
Hunt is due to give his Autumn Statement on Nov. 22, and is under pressure from some in his Conservative party to cut taxes ahead of a national election expected next year.
Hunt has cited the government’s aim of halving inflation and rising debt servicing costs as reasons why the government is not in a position to cut taxes.
The Resolution Foundation’s analysis said that higher tax receipts and lower borrowing – both a result of sticky inflation – would increase Britain’s fiscal headroom by 13 billion pounds ($16.09 billion), but added this was based on “implausible” public spending plans.
“While this will give the Chancellor the appearance of extra wriggle room in his Autumn Statement, it is in fact a fiscal illusion founded on the idea that higher inflation will increase tax revenues without also pushing up spending on public services,” said James Smith, research director at the Resolution Foundation.
The Bank of England expects Britain’s high inflation to only return to its 2% target at the end of 2025, roughly six months later than previously forecast.
That higher inflation is affecting public spending. The Resolution Foundation said that recently agreed public sector pay settlements would already soak up the headroom, but government plans had not been updated to reflect that.
Public spending will also have to increase more than is currently forecast to protect the budgets of some ministries in real terms in the coming years, the think-tank said.
“It’s increasingly clear that spending plans pencilled in for after the next election cannot be delivered,” Smith said.
($1 = 0.8081 pounds)
(Reporting by Alistair Smout; Editing by Sharon Singleton)