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Rishi Sunak could cut taxes and spend more

News that the Government has borrowed £11bn less this year than was previously forecast may open up opportunities for Rishi Sunak.

Make no mistake – after a Covid-era spending splurge, the public finances are still in a shaky state and Britain’s debt burden remains remarkably high by historical standards.

And, of course, the deficit would be significantly larger if the Conservatives had not hiked the proportion of GDP handed over to the state in taxes to its highest level ever outside times of war.

Nonetheless, the boost reported by the Office for National Statistics does slightly widen the range of options available to the Prime Minister and Chancellor ahead of the autumn statement coming later this year.

Both in No 11 and No 10, Mr Sunak has made much of his desire to lower taxes (though there are also questions over whether the tight public spending settlement currently in the Government’s plans will need to be revisited).

He may be tempted to answer the prayers of many Conservative MPs and push Jeremy Hunt to unveil a range of targeted tax cuts in the coming months – perhaps cutting the cost of energy bills or filling up a car, or lowering the levies faced by small businesses as they try to grow.

Another option would be pushing up the threshold at which taxpayers become liable for the basic and higher rate from income taxes, a sort of compensation for the burden of inflation which has sucked millions into paying more than they used to.

But there would be undoubted downsides. The Chancellor is well aware that his last Budget left his fiscal rules teetering on a knife edge: his “headroom”, the amount by which borrowing is coming in within his five-year fiscal rules, is just £6.5bn. So an £11bn bonus is very welcome – but the outlook would not have to deteriorate much to put his plans on the wrong side of the line.

In any case, the good news so far this year may well be wiped out by an increase in long-term borrowing costs as a result of higher interest rates. Given the circumstances in which they came to power, Mr Sunak and Mr Hunt are always cautious about doing anything that might undermine the UK Government’s fiscal credibility and prompt what top economist Simon French describes as “a renewed puke in debt markets”.

It will be no consolation to Tory MPs – or hard-pressed taxpayers – but the fact is, there is little chance of a let-up in fiscal policy any time soon.

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