UK finance minister predicted to make pre-election tax cuts announcement.

• As the Conservative government prepares for its final fiscal event before the general election, Hunt faces pressure to provide a voter-pleasing incentive.
• Across all national polls, the Labour Party leads his party by more than 20 points.
• According to Deutsche Bank, the government's fiscal headroom is estimated to increase from approximately £13 billion ($16.46 billion) to £18.5 billion. The bank predicts that tax cuts are "very likely" to be the initial action taken.

At his Spring Budget on Wednesday, Jeremy Hunt, the U.K. Finance Minister, is predicted by economists to utilize a minor fiscal surplus to announce a modest set of tax reductions.

As the Conservative government prepares for its final fiscal event before the General Election, Chancellor Philip Hammond is under pressure to provide a voter-pleasing incentive, with his party trailing Labour by more than 20 points in all national polls.

He must navigate the constraints of fragile public finances and a stagnant economy that recently entered a modest technical recession.

Although inflation has fallen faster than expected, market anticipations for interest rates are still below where they were before Hunt's Autumn Statement in November.

According to Deutsche Bank Senior Economist Sanjay Raja, in a research note on Thursday, the Chancellor Hunt's fiscal headroom is likely to increase only marginally, far from what he had in the Autumn Statement, mainly due to the decrease in expected debt costs.

The German lender predicts that the government's fiscal headroom will increase from approximately £13 billion ($16.46 billion) to £18.5 billion, and tax cuts are "very likely" to be the initial action. Raja believes the finance minister will exercise caution when relaxing fiscal policy, prioritizing supply-side support over stimulating demand.

In our view, supply side measures are more likely, given the Bank of England's willingness to loosen monetary policy, according to Raja.

"In contrast to earlier expectations of income tax cuts, the Spring Budget is more likely to include tax cuts to national insurance contributions (NICs) and changes to child benefits."

The Autumn Statement's main feature was a significant reduction in National Insurance, but economists noted that this would be offset by the impact of existing personal income tax thresholds on payers, resulting in "fiscal drag."

The tax on workers' income and employers' profits in the U.K. funds state social security benefits, including the state pension.

Raja proposed that the government may consider extending the freeze on fuel duty and implementing spending cuts to partially offset a relaxation of fiscal policy.

Deutsche Bank anticipates that Hunt will achieve a net loosening of £15 billion in the upcoming fiscal year, with a medium-term target of around £12.5 billion.

Raja stated that the public finances are still uncertain, and small changes to the macroeconomic outlook could lead to significant shifts in the public finances. The Chancellor must balance managing his fiscal rules now while preparing for potential austerity measures in the future.

"The public finances present significant challenges, such as determining whether spending cuts or limited increases in specific areas are feasible to address the strain on public services, and whether the government's net-zero, defense, and overseas development spending ambitions are achievable."

The government will have a fiscal windfall of around £11 billion in the 2024/25 fiscal year, according to BNP Paribas economists, who predict a more modest package of tax cuts worth approximately £10 billion.

The Bank of England will not be significantly affected by the reductions agreed upon by the French bank, as their goal is to boost employment without significantly impacting inflation.

"According to Matthew Swannell and Dani Stoilova in their research note titled "last-chance saloon," our base case is that the government will allocate GBP10bn of the near-term fiscal surplus towards reducing personal taxes, while using the resulting medium-term fiscal room to make further cuts."

The government is seeking to delay the March 2024 increase in fuel duty by 12 months and reduce the basic rate of income tax by 1 pence permanently, which would cost between £6 billion and £7.35 billion annually.

The policy package would result in medium-term fiscal headroom being restored to its initial level of GBP12.7bn.

"The Conservative party is behind in the polls, and the Budget may be the last chance to ease fiscal policy before a general election. As a result, we anticipate that Chancellor Hunt will use any available fiscal space to spend more."