Ruth Gregory at Capital Economics, a former economist at the Office for Budget Responsibility (OBR), said: “Taken together, this might be expected to reduce borrowing by around £12bn by 2028-29. Public sector current receipts are about £1.2bn lower, but debt interest spending is reduced by about £13.8bn.
“Assuming the moves are sustained and all else is equal, we estimate the headroom could rise from £13bn against the Chancellor’s main fiscal rule to about £24.5bn, an increase of £11.5bn.”
Capital Economics believes the Treasury could enjoy an even bigger windfall in the March Budget if January pay deals are larger than expected.
Gregory added: “If we are right, this would be consistent with an even bigger buffer of about £35bn against the Chancellor’s main fiscal rule.”
Ms Gregory said Mr Hunt could afford to cut taxes by more than £10bn while maintaining some headroom. Cutting income tax by a penny would cost roughly £7bn a year while abolishing inheritance tax would cost about £8.4bn.
Ms Gregory agreed that Mr Hunt and Rishi Sunak were likely to favour “headline-grabbing measures that voters feel the benefits of quickly to help prime the polls”.