Inflation is the chancellor’s friend if he only considers his income.
The official figures for the public finances show total tax revenues rose by 13.2% in January from the same month a year ago.
Corporation tax was 27.9% higher after companies jacked up their prices. Self-assessed income tax was up 33.3% and PAYE income tax, which is by far the largest slug of tax receipts, jumped 10.6% above January 2022 on the back of a worker shortage that sent private sector wages up from the pre-pandemic average of 2% to near 7%.
This deluge of cash flowing into Jeremy Hunt’s coffers is welcome news when the government has spent hundreds of billions of pounds tackling the effects of Covid-19 and the fallout from the Ukraine war. It is income that eases the pressure from international investors worried about the UK government’s sanity when the Conservative party handed Liz Truss the levers of power, only for her to push and pull wildly until the economy entered a nosedive.
Hunt can claim that calm is restored and the flight path, while still likely to be bumpy, is a safe distance from the ground.
His dilemma emerges when he looks at the calls on expenditure that will get louder now that he appears to have more money to spend.
Compared with the predictions made last November by his independent forecaster, the Office for Budget Responsibility, for the 2022-23 financial year, cumulative borrowing is £30bn less than expected at £108.7bn.
This is £30bn he would prefer to set aside at next month’s budget as part of a plan to bring down the annual deficit and eventually the UK’s total debt pile.
But with public sector pay destined to punish those on the government payroll with the steepest cuts in living standards, unions have other ideas.
His right-wing colleagues will clamour for personal and corporate tax cuts. More moderate Tories will say he can do both. Meanwhile, civil servants will remind the chancellor that the fabric of public service provision has gone beyond the stage where it can be described as fraying. In many areas it is falling to bits.
Bus services need more money, school roofs are leaking and mental health services are on their knees. The list of suffering services is long after 12 years of austerity and will only get worse if the chancellor prioritises debt reduction over investment, whether that is in people or physical infrastructure.
One of Hunt’s mantras, and one he is expected to repeat during his budget speech, is that bringing down debt reduces the burden on the next generation.
What this flawed analysis ignores is that the government offers the next generation few favours if the health service and the schools system is squeezed and much of the service provision for those who cannot work is damaged.
So far Hunt has been lucky. A warmer winter than expected helped him to keep the costs of his energy subsidy lower than expected and a recession is looking increasingly unlikely now that the spillover effects from the Ukraine war are easing.
His next move will be crucial though, and there is every reason to believe he will step in the wrong direction.