No tax cuts coming this year

Tax cuts this year remain impossible despite a surprise fall in inflation below 8 per cent, Jeremy Hunt believes.

Persistently high interest rates mean the Government faces a £13.7bn black hole in its finances – potentially forcing more spending cuts or tax hikes in order to balance the books.

Consumer price inflation stood at 7.9 per cent in June, according to the Office for National Statistics, down from 8.7 per cent the month before.

The fall took markets and ministers by surprise, but still leaves UK inflation higher than any other G7 country or major European economy with no guarantee that Rishi Sunak will hit his target of halving the rate this year.

“It is not quite there yet,” Treasury source said. “We projected a series of drops on the way to halving inflation, but we are still behind by a couple of months.”

The rise in the cost of servicing Government debt as a result of repeated interest rate hikes means the Exchequer is likely to spend an extra £13.7bn a year by 2028 under current market conditions, according to the Office for Budget Responsibility.

That would entirely wipe out the £6.5bn “headroom” in the last Budget and require more than £7bn in lower Government spending or higher taxes to keep the Chancellor on track to bring down public debt as required by his own fiscal rules – the equivalent of a 1p rise in the basic rate of income tax.

Mr Hunt said: “We are seeing the first fruits of that but there’s a long way to go and we need to remember that families are still feeling a lot of pressure with very high food price inflation.” The Prime Minister added: “I’m not complacent. I know things are tough. But the figures out today show that our plan is working. It means that we have to keep taking responsible difficult decisions.”

The Resolution Foundation said that the “chunky inflation rate fall” was “unambiguously good news”, with wages finally growing in real terms. But Rachel Reeves, Labour’s shadow Chancellor, said: “Inflation has been persistently high and remains higher than our international peers. This is becoming a hallmark of Tory economic failure.”

Mr Sunak rallied his troops on Wednesday evening before they left Westminster for the summer recess, vowing that he would set out his long-term vision for the country in the autumn.

The Prime Minister is understood to have told a meeting of the 1922 Committee of Conservative backbenchers: “In the coming months, I am going to set out more of what I would do if I had a full term. I was recently described as a full-spectrum modern Conservative and you are going to see that in the programme I lay out.”

But Mr Sunak’s ambition to force banks to treat their customers better appeared at risk as the Financial Conduct Authority’s chief executive Nikhil Rathi said he was opposed to the idea of bringing in a “savings charter” to ensure banks pass on higher interest rates to savers.

The major banks signed up to a new “mortgage charter” put forward by the Treasury as part of government efforts to support borrowers deal with the rapid increase in costs.

But Mr Rathi said he doubts whether such an approach would be the best way to ensure banks are passing on higher interest rates to savers as quickly as they do to borrowers. “I am less keen on a savings charter,” he told MPs on the Commons Treasury committee.

“I think the mortgage charter is different because that is about who you treat customers in difficulty, vulnerable customers. In savings we want a vibrant, dynamic competitive market, where people are competing with each other to win business off each other.”

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