Rishi Sunak is set to declare this week that his promise to halve inflation has been met, contributing to a more positive economic backdrop to the Autumn Statement on November 22.
The Bank of England expects headline inflation to fall sharply from 6.7 per cent in September to below 5 per cent in October, when official price data is published on Wednesday, meeting one of Sunak’s “five priorities”.
Senior Tory officials see Wednesday’s announcement as a “pivotal” moment at which they hope to start mapping out a more optimistic economic picture ahead of an election expected next year.
The prime minister announced in January he wanted to see inflation halve by the end of the year. It was running at an average of 10.7 per cent for the last quarter of 2022 at the time he made the pledge.
Better news on inflation is expected to be mirrored by a better than expected fiscal situation when Jeremy Hunt announces his Autumn Statement, giving the chancellor some modest scope for targeted tax cuts.
Harriett Baldwin, Tory chair of the Commons treasury committee, told the Financial Times that in spite of the economy’s travails she expected Hunt to deliver a “feel-good Autumn Statement”.
Downing Street insiders said Sunak would argue on Wednesday that “hard work” and some “painful” decisions — notably in holding down public sector pay — were starting to pay dividends.
Referring to the expected sharp fall in inflation, one ally of Sunak said: “The hard work doesn’t stop. This isn’t a ‘job done’ moment. Getting inflation down remains the most important thing.”
The BoE said this month in its monetary policy report: “Inflation is expected to fall to 4.8 per cent in October and remain around that level for the rest of the year.
“The main driver of the expected fall in Q4 is a reduction in the Ofgem energy price cap, reflecting the decline in wholesale gas prices over the course of 2023.”
Bringing down inflation to the BoE target of 2 per cent is expected to be a tougher task and Hunt will insist in his Autumn Statement that he will not do anything that jeopardises that work.
With the BoE predicting that the economy will continue to flatline throughout 2024, Hunt has said his big fiscal event will focus on removing barriers to growth.
Buoyant tax receipts — boosted by a longstanding “stealth” freeze on tax allowances and thresholds — has given Hunt the option of examining potential tax cuts deemed to have little or no impact on inflation.
Last week the Resolution Foundation think-tank predicted that Hunt’s headroom against his fiscal mandate — having debt falling as a share of the economy in the final year of the forecast — could double from a forecast £6.5bn in March to about £13bn.
Hunt said last week: “Cutting business taxes is the thing that’s most important at this stage.” He wants to extend the flagship “full expensing” capital allowance regime beyond its 2026 expiry date and is still considering whether he can afford to make it permanent.
A symbolic cut to personal taxation — for example, cutting inheritance tax — could be seen as a downpayment on a more ambitious tax cutting spring Budget, without posing a big risk to inflation.
Hunt will come under new pressure to cut taxes on Tuesday with the publication of a report by a Growth Commission, set up by former premier Liz Truss, which will make the case for aggressive tax cuts.
Meanwhile, Sunak will deliver a set-piece speech on Monday at the Lord Mayor’s banquet in the City of London, claiming that 2023 had been “one of the most significant years” for British foreign policy in recent times.
Sunak will argue that Britain is back on the world stage after the traumas of Brexit and the upheavals of the Boris Johnson years and that new international partnerships had been forged on defence, trade and migration.