UK set for inflation rise and possible recession in double Budget blow for Hunt

The Treasury is braced for a double Budget blow next week with official data expected to show an increase in the rate of inflation and a possible recession.

Rishi Sunak has promised that he will continue to cut taxes on workers as he seeks to draw election dividing lines with Labour.

But figures released by the Office for National Statistics (ONS) in the coming days may make it harder for Jeremy Hunt to reduce the tax burden when he delivers the Budget in three weeks’ time.

On Wednesday, price statistics will reveal whether the rate of inflation is continuing to fall or is flatlining.

The annual rate of Consumer Prices Index inflation in December stood at 4 per cent, slightly up from 3.9 per cent in the previous month. Economists forecast another increase for January, which would appear in Wednesday’s figures.

Laura Trott, the chief secretary to the Treasury, told the Sunday Times: “There will be bumps in the road and on Wednesday we can expect inflation to slightly increase when data for January is published.”

The expected rise is attributed to a rise in the energy price cap which took effect last month. Analysts still believe inflation will fall back to its target of 2 per cent over the course of this year.

On Thursday, the ONS will publish its first estimate for GDP growth in the final quarter of 2023. The economy shrank by 0.1 per cent between July and September – so if there was a second consecutive quarter of negative growth, the UK will technically be in recession.

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uk set for inflation rise and possible recession in double budget blow for hunt

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Jeremy Hunt under pressure to give manufacturing firms tax breaks in Budget

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Higher inflation can squeeze the public finances by driving up the government’s borrowing costs, while slower economic growth reduces tax revenues.

A Treasury source told i: “We need to make people aware that inflation may tick up this week, and we’ve also got GDP figures which could show there’s been a recession.”

The Prime Minister and Chancellor have both suggested they want to reduce taxes again at the Budget on 6 March, but it is unclear whether they will be able to enact significant cuts without risking their fiscal rules which determine how much the government can borrow over a five-year timeframe.

Mr Hunt’s headroom – the difference between current borrowing forecast and the maximum allowed under the rules – is understood to be only slightly higher than the £13bn recorded at the Autumn Statement three months ago.

A Treasury spokesman said: “We have taken decisive action to tackle inflation and reduce debt, which is why we’re beginning to see the economy turn a corner.

“While we have doubled our headroom since March, from £6.5bn to £13bn, it remains low by historical standards and can be wiped out by changing economic conditions.

“That’s why we must stick to our plan to reduce debt by growing the economy and being responsible with spending.”

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