George Osborne is considering giving middle-class workers a tax cut, but may have to raise the cost of fuel to keep his deficit reduction plan on track.
The chancellor has already decided to inflict further spending cuts on his departments as evidence has mounted that he will borrow more this year than had been expected.
His decision last year to drop controversial cuts to tax credits for low earners means that he has very little wiggle room in the budget, which he will unveil on March 16. Uncertainty about Britain’s public finances means that he has not yet been able to make any final decisions. He will only receive independent projections for Britain’s economy from the Office of Budget Responsibility (OBR) next week.
He is likely, however, to prioritise a pledge to raise to £50,000 the threshold at which workers begin to pay 40 per cent tax, and may accelerate efforts to deliver the promise.
At present workers start paying 40p on earnings above £42,385 a year. The figure will rise to £43,000 from April, but the Conservatives have pledged to raise it to £50,000 by 2020.
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Mr Osborne may also raise the point at which workers start paying tax. It is currently set to rise to £10,800 from April and then to £11,000 next year.
He was forced last week to ditch an overhaul of pension tax relief, which risked provoking a Tory rebellion and backlash from higher earners. He had been considering radical changes that would have meant an end to tax relief on pension contributions, bringing the cost up front in exchange for allowing workers to claim their pension free of tax in retirement.
Mr Osborne has been under pressure from Tory MPs to consider cutting the top rate of tax from 45p to 40p. He argued last week that cutting the top rate from 50p to 45p had actually increased the tax take from top earners by £8 billion in the year following the change.
However, other senior Tories are very wary of going ahead with any further cut to the top rate of tax. The Conservatives suffered a huge dip in their popularity in 2012 when the 50p rate was slashed.