Tax cuts likely with Jeremy Hunt's ￡14bn budget headroom (Image: Getty)
Treasury number crunchers said it means the Chancellor has more money to play with than the ￡13 billion he had his Autumn Statement in November.
But the figure is lower than the ￡20 billion “fiscal headroom” forecast by independent analysts.
The estimates will not be finalised by the Office for Budget Responsibility until days before the March 6 event.
Mr Hunt is weighing up cuts to income tax or another reduction in national insurance in the Budget.
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Changes to income tax could cost up to ￡14 billion alone.
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The Treasury said: “While we have doubled our headroom since March [2023], from ￡6.5 billion to ￡13 billion, it remains low by historical standards and can be wiped out by changing economic conditions.”
The size of the headroom is highly volatile given the impact of shifts in rate expectations as well as changes in economic variables, including inflation.
Just a one percentage point change in interest rates and inflation could cost ￡29.6 billion by the end of the forecast.
Market analysts are more optimistic about the likely scale of the headroom.
Capital Economics has predicted the Chancellor will have headroom of ￡19 billion while Bloomberg Economics has forecast a buffer of between ￡17 billion and ￡25 billion.
The Treasury analysis comes ahead of the first pre-Budget fiscal forecast by the OBR next week, which will form the basis for Mr Hunt’s tax and spending decisions.
A source said: “At the moment we are in an ok position, tax cuts remain very much on the cards.”
Mr Hunt fired the starting gun on tax cuts in his Autumn Statement with a 2p reduction on the rate of national insurance - which is set to appear in the pay packets of 27 million workers this week.
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This is worth an extra ￡1,000 a year for a couple earning the national average. And the Chancellor has declared it is time to put more money in the pockets of working people.
Writing in the Daily Express on Friday Mr Hunt promised to cut taxes further.
He said: "We are now able to start rewarding the grafters. Cutting taxes to put more money in your back pocket. But we must stick to our plan."
Tory party chairman Richard Holden yesterday (Fri) suggested there would be two tax-cutting financial announcements this year.
Mr Holden touted tax cuts in the March 6 Budget, adding that there will be “more of that later in the year as well”.
He told GB News: “What we are now in is a situation where we are coming out of that very tough period, and we’re able to outline our plans for the future."
“And I think the actual tax cut – you mentioned the national insurance cut for working people – is the start of that."
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“We’ll see more of that in March, and more of that later in the year as well. We have that new direction of travel, which is clear.”
It was unclear from his comments whether the second fiscal event would be before or after the election, with the power to trigger a vote being down to the Prime Minister.
Mr Sunak has said that it is his “working assumption” that he will hold the election in the second half of the year.
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