Weaker forecasts and "stealth" tax rises expected from UK chancellor

(Alliance News) - Deutsche Bank AG expects to see UK Chancellor Jeremy Hunt paint a weaker picture of the economy and announces a series of stealthy tax hikes during Thursday's autumn statement.

Oil and gas profit could fall under fiscal policy cross-hairs, Deutsche added, while eyes will also be on the successor to the UK government's energy bills subsidy.

Deutsche Bank analyst Sanjay Raja commented: "This week's autumn statement will lay bare the government's fiscal consolidation plans over the coming years, with Chancellor Hunt looking at 'eye-watering' decisions to get the public finances back in order. And to be sure, we expect Chancellor Hunt's inaugural fiscal statement to highlight the harsh realities facing the public finances, as the energy price shock unfolds, interest costs soar, and the economic backdrop deteriorates significantly.

"We expect the chancellor to set out a materially worse set of fiscal projections (compared to the Spring OBR forecasts)."

Raja expects a "deep and protracted recession in 2023 with growth likely to remain subdued until 2025 at the earliest". He also expects inflation projections to be "increased significantly".

The analyst expects the Office for Budget Responsibility to warn of "a slow labour force recovery, with the unemployment rate pushing to around 5.5% to 6% over the next two to three years".

"All up, the challenging economic outlook will likely underscore the main reason for the size of the fiscal hole, with our borrowing projections pushing a little above GBP90 billion in 2026/27," Raja added.

"What's the [current] scale of the fiscal challenge? According to recent reports, roughly GBP50 to GBP60 billion – broadly in line with our own estimates."

Raja tips Hunt to focus his tax fundraising efforts to be centred on "freezing personal allowances and tax bands".

"The tax-free allowances for most income tax bands, as well as with inheritance tax, pensions tax, and dividend tax are all likely to be frozen at current levels. News reports also now firmly suggest that the chancellor will be looking to bring down the additional rate tax threshold from GBP150,000 to GBP125,000 in order to raise more income. And we could see the same for capital gains tax too," the Deutsche Bank analyst said.

"Away from 'stealth taxes', we expect to see a couple more options announced on Thursday. First, an increase in council tax with local authorities allowed to raise the level of council tax above 3% without a referendum. And second, an increase in both the duration and scale of the windfall tax on oil and gas 'excess profit'."

Hunt is considering increasing the windfall tax on oil and gas giants from 25% to 35% while also expanding the levy to electricity generators, PA reported.

Raja expects this measure to bolster the UK's coffers by GBP5 billion.

"Altogether, the impact of the 'fiscal drag' from stealth taxes as well as higher windfall taxes is expected to net the chancellor close to GBP35 billion, given higher inflation and elevated gas/electricity prices," Raja added.

Elsewhere, the focus will be on new energy price help measures to be announced by Hunt.

"It now seems clear that the chancellor will look to push through a policy that keeps inflation down over the coming quarters. What should we expect? A German-style gas (and electricity) price brake, with energy prices capped by price and usage – one of the options we raised last week," Raja added.

By Eric Cunha; [email protected]

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