With his plans ripped up, Jeremy Hunt may go where Labour can’t follow

Before every budget and autumn statement, the Treasury draws up a shopping list. Then it takes the list to the independent Office for Budget Responsibility, which tells it how much it can actually afford (a step crucially neglected by Liz Truss and Kwasi Kwarteng).

In normal circumstances this process is fairly orderly. But in times of volatility, and in particular when inflation and borrowing are high, short-term changes in the economic weather can have an outsize effect.

Before the autumn statement in November, Jeremy Hunt spent months telling people (including me) that there wouldn’t be much room for tax cuts. Then the wind changed. Week on week, the forecasts from the OBR improved. By the time the numbers were locked in, Hunt found himself able to splurge £20 billion on tax cuts — the biggest handout since 1988.

Now, however, the wind has changed again. Week by week, Treasury sources say, the numbers from the OBR have been getting worse. As a result, the chancellor’s “headroom” — the amount he can spend on that shopping list — has come down from £30 billion to just £13 billion. (And he can’t actually spend much of that, because he needs to keep a reserve in case of unexpected shocks.)

To expand his freedom of manoeuvre, Hunt is considering squeezing future spending, which he already squeezed to pay for the last round of tax cuts. The idea would be to go from annual increases in day-to-day spending of inflation plus 1 per cent in the next parliament to inflation plus 0.75 per cent. But even then, there would be only limited scope for giveaways.

Why is this happening? The simplest answer is to look at the same bond markets that proved fatal for Truss and Kwarteng. Between October and December the yield on ten-year gilts — effectively, the interest rate the UK has to pay on its borrowing — fell substantially. But over the past two months it has risen again, from 3.4 per cent to 4.1 per cent.

That is a problem, because we have borrowed and are borrowing quite extraordinary amounts. In the past 12 months we spent £79 billion just to cover the interest on our debts — while putting a further £114 billion on the credit card. And that rise in gilts makes such borrowing 20 per cent more expensive than it was at Christmas.

But that’s not the only problem. After the autumn statement I interviewed Richard Hughes, the head of the OBR. He explained that the combination of high domestic inflation and frozen income tax thresholds created a bonanza for the Treasury. People were getting big pay rises but having to pay more of that cash to the taxman. The resulting flood of money helped cover the soaring cost of government debt.

The nightmare scenario, Hughes warned, was for inflation to fall and wage growth to slow while interest rates stayed high. And that’s pretty much what has happened. Inflation has fallen faster than the OBR predicted — a success for the government. But that will mean less tax revenue to cover the costs of borrowing, even as those costs increase sharply.

Of course, with an election looming and the economy in a recession (albeit a shallow one), Hunt will still want to generate a feelgood factor. So what will he do?

The word from the Treasury is that the priority — as in the autumn statement — will be to “grow the economy and reward work”. Hunt’s pledges in the autumn were not just about giving people more cash in their pockets but also bringing them back into work: the OBR projected that his plans would swell the labour force by between 55,000 and 240,000 people. That focus on rewarding work was also a big reason why he cut national insurance rather than income tax — and why any cash spare this time is overwhelmingly likely to go towards a further cut in NI, with reports suggesting No 10 and No 11 are desperately trying to scrape together the money for another 2p reduction.

But it is not actually the tax cuts — much though they obsess Westminster — that get the chancellor’s juices flowing. His passion, as he repeatedly makes clear in his speeches, is to turn Britain into another Silicon Valley. To do that, he needs to maximise capital and investment, reform the pensions sector and lots of other boring, fiddly things.

That is why, for all the headline-grabbing measures, he has primarily focused on long-term reforms: 107 of them last time round, including welcome measures to speed up infrastructure delivery and the introduction of full expensing, which gives Britain one of the most attractive regimes for capital investment.

We can expect more in the same vein on March 6, with measures under consideration on pensions and capital markets (in particular a “British ISA”, to get people investing in the UK equity market); welfare and inactivity; and even some moves on planning and housing — though nothing like as much as is needed.

The primary objection, especially on the left, will be that it is hardly long term to starve public services of funding. Even some Tories worry that it may be an error to prioritise tax cuts when voters are more concerned about the NHS. Many observers already deplored the squeeze on spending in the autumn statement. How will they react if Hunt squeezes yet again?

The Treasury is certainly alive to this concern. But its riposte is simple. Britain’s economy is in recession. The most important thing — not least if we want to spend more down the line — is to get out of it as quickly as possible. That means prioritising measures that deliver growth.

Things may still change if the OBR comes back with rosier numbers. But if it doesn’t, that raises a fascinating question politically. So far, Labour’s response to Hunt has been to loudly lament his spending decisions while banking his tax cuts. But would Rachel Reeves feel able to endorse another national insurance cut, at the price of tying her party’s hands still further on spending?

The Tories are certainly desperate to fight the election against a higher-spending, higher-taxing Labour Party. March 6 may be the moment at which Rachel Reeves and Keir Starmer are finally forced to oblige them.