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Jeremy Hunt will cut taxes in his Spring Budget — on that most Tory MPs and economists are agreed. But the UK chancellor on Thursday continued to manage down expectations about the scale of any reductions.
“It doesn’t look to me like we will have the same scope for cutting taxes in the spring Budget that we had in the Autumn Statement,” Hunt said. “I need to set people’s expectations about the scale of what I’m doing because people need to know that when a Conservative government cuts taxes we will do so in a responsible and sensible way.”
Hunt’s attempt to play down the prospect of a big giveaway is said by government insiders to reflect both a wish to lower the expectations of a tax-cutting spree ahead of the general election later this year, while also injecting a dose of economic reality into the debate.
Hunt and Prime Minister Rishi Sunak stoked expectations last month, openly speculating that the March 6 Budget would contain a fresh round of tax giveaways to bolster the Conservatives’ poor polling figures — the governing party is trailing Labour by more than 20 points on average — as they prepare to fight an election.
Torsten Bell, director of the Resolution Foundation think-tank, said: “The chancellor is certain to announce further tax cuts in March. He’s just having to rein in expectations because he and the prime minister let those expectations get out of hand.”
Hunt’s caution also reflects the Treasury’s own modelling which suggests he could only have £14bn of fiscal “headroom” against his self-imposed target of cutting debt as a share of gross domestic product in five years’ time.
The figure, which was leaked last week, compares with the £30.1bn of headroom Hunt had ahead of the Autumn Statement in November before he announced tax-cutting measures from the despatch box.
On that occasion, Hunt cut national insurance rates and business taxes by a combined £20bn which, along with other smaller measures, reduced the headroom to £13bn, a level he admitted at the time was “low by historical standards”.
The first fiscal forecasts from the Office for Budget Responsibility are said to “broadly” reflect Treasury officials’ analysis of £14bn of “pre-measures” headroom. However, independent forecasters think the figure will be higher and the OBR’s final forecasts, still a month off, could change dramatically.
“Even a tiny change in gilt yields has massive fiscal impact,” said one government insider. Hunt’s team is hoping better news between now and March 6 will allow him to deliver his promised “smart” tax cuts.
The chancellor has made it clear that any tax cuts will be aimed at boosting growth and employment; senior Tories say he is not countenancing cutting inheritance tax — a popular cause among some MPs in the governing party.
A 1p cut in the 20p basic rate of income tax would cost £7bn a year, while a 1p cut in the main rate of employee national insurance contributions would cost closer to £5bn.
Hunt has left open the possibility of another fiscal event, that would allow him to cut taxes, ahead of an expected autumn general election, but Treasury insiders said he was not planning for that ahead of the March Budget: “He tells everyone that this is it,” said one.
Senior Tories said the calculation for Hunt and Sunak was simple. If the economy improves over the next six months and the OBR is expected to produce new forecasts offering scope for more tax cuts, then an Autumn Statement would be a no-brainer.
But if the OBR was likely to produce more pessimistic forecasts — suggesting Hunt might even have to raise taxes or cut spending to meet his fiscal targets — then an Autumn Statement would be binned. For now, all the focus is on the March Budget.
Given Hunt’s relatively limited room for manoeuvre when it comes to election-changing tax cuts, he has amended his rhetoric, telling the BBC’s Political Thinking podcast: “We want to be clear that the direction of travel we want to go in is to lighten the tax burden.”
In the meantime, he has also been pinning his hopes on the Bank of England coming to the rescue with interest rate cuts, as inflation continues to fall towards the bank’s 2 per cent target.
“That probably is the moment when people will begin to have more confidence about their own personal prospects and the prospects of their family,” he told the Financial Times in December.
The BoE on Thursday said it required “more evidence” that inflation was falling before implementing interest rate cuts, as it held borrowing costs at 5.25 per cent.
