Jeremy Hunt’s pre-election tax cuts plan could be ruined by high borrowing
Jeremy Hunt may be unable to cut taxes again before the general election after Britain’s borrowing figures took a turn for the worse, economists have warned.
The Chancellor is hoping to cut employee national insurance contributions by another 2p in an Autumn Statement held in September, if the general election is called for October or November as is widely expected. Mr Hung is also said to be weighing up a cut to stamp duty.
Data from the Office for National Statistics (ONS) showed that the Government borrowed £120.7bn last year – less than the previous year, but £6.6bn more than the Budget watchdog had forecast.
The Treasury took in lower tax receipts than expected following persistent weakness in income growth for the highest earners.
Andrew Goodwin of the EY Item Club, an economic forecasting group, said: “Unless the Chancellor is prepared to assume even greater spending restraint, it’s unlikely there will be another tax-cutting fiscal event before the election.”
Ruth Gregory, of Capital Economics, added: “If the Chancellor was hoping March’s figures would provide more scope for tax cuts at a fiscal event later this year, he will have been disappointed. Just based on the larger-than-expected 2023-24 budget deficit and the recent shift up in market interest rates, he may have even less fiscal ‘headroom’ (perhaps about £5bn) for tax cuts than the £8.9bn left over in March.”
Treasury sources said the ONS projections would not stop the Chancellor from meeting his fiscal rules, which require the national debt to be on a downwards trajectory over a five-year timeframe. But Mr Hunt is understood to believe that the data show the need to be cautious with public finances.
Isabel Stockton, from the Institute for Fiscal Studies, warned against using fluctuations in the borrowing figures as a basis for major fiscal decisions, telling i: “We are not keen on the idea of permanent tax cuts based on short-term numbers. Your decisions about long-term changes should be made on the basis of long-term trends.”
And Rob Wood, of Pantheon Macroeconomics, predicted that further tax cuts could still be on the cards. He said: “We expect the Chancellor to cut taxes again before a likely October or November general election, despite borrowing overshooting his forecasts.
“Hunt can plan for another year of unrealistically weak public spending to generate ‘headroom’ against his fiscal rules and thereby manufacture the funds to cut taxes.”
The former pensions minister Steve Webb predicted that increasingly tight public finances would mean young people having to wait until their seventies before they are entitled to their state pension.
He told the Bright Blue think-tank: “I can’t see a world where there is no state pension [but] I can see a world where, I am afraid, you and your younger colleagues wait until a number beginning with seven. I think that’s perfectly plausible.
“They could toughen the rules, so at the moment you sort of need 35 years in the system, to get a full pension, they might make that 40, they might price index it, I can see those kind of things happening, they might toughen up the tax treatment.”
A Treasury spokesman said: “Debt increased in recent years because we rightly protected millions of jobs during Covid and paid half of people’s energy bills after Putin’s invasion of Ukraine sent bills skyrocketing.
“We can’t leave future generations to pick up the tab, so we must stick to the plan to get debt falling. And with inflation falling and wages rising – we have been able to cut national insurance by a third, which shows our determination to end the double taxation of work.”
