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Jeremy Hunt promised on Sunday to put Britain “on a path to a lower-tax economy” in this week’s Autumn Statement, fuelling Conservative MPs’ expectations he will announce cuts to personal and business taxes.
The chancellor has shelved plans to cut inheritance tax until next year, raising Tories’ hopes that he could instead honour prime minister Rishi Sunak’s promise to start cutting the 20p basic rate of income tax.
Sunak said last year that he wanted to lower the rate to 16 per cent by the end of the next parliament. A 1p cut from next April would be seen by MPs as a downpayment on that pledge. It would cost about £6bn, according to HMRC estimates.
Tory strategists had initially planned to hold back headline-grabbing income tax cuts until the spring Budget — closer to the likely date of the next election — but the party’s dire opinion poll ratings have put pressure on Hunt to act now.
One senior Tory MP said this was the “last opportunity” for Sunak and Hunt to make bold moves and that an income-tax cut would be welcomed: “If you leave it to the run-up to the election, nobody takes it seriously.”
A senior Tory insider said: “They’ve been looking at a 1p income tax cut. Number 10 needs a silver bullet. They need to do something to calm down the right of the party.” Hunt declined to rule out an income-tax cut.
Higher-than-expected tax revenues and lower debt servicing costs have given Hunt more fiscal headroom than had previously been expected, leaving him with scope for giveaways next Wednesday.
At the spring Budget he had a £6.5bn cushion against his target of cutting debt as a share of GDP in the fifth year of the forecast. JPMorgan estimates that in this week’s forecasts the headroom before any policy measures could rise to about £26.5bn.
The chancellor’s allies say the biggest tax cuts on Wednesday will target business; Hunt said on Sunday that the principal focus of the Autumn Statement would be on boosting growth.
Government insiders expect Hunt to fulfil his ambition to make permanent the flagship “full expensing” capital allowance regime, which is due to expire in 2026, at a cost of about £9bn a year.
Hunt regards full expensing, which lets businesses deduct the full cost of investments in IT equipment, plant or machinery from their profits, as one of the most generous capital allowances of any major economy.
Hunt said he would not announce any tax cuts that hampered the Bank of England’s efforts to cut inflation to its 2 per cent target, but he argued that Britain had “turned a very big corner” in halving inflation this year to 4.6 per cent.
“I won’t do any kind of tax cut that fuels inflation,” he told Sky’s Trevor Phillips. But, he added, “we need to show there’s a path to a lower tax economy”.
Until recently Treasury officials had suggested that an income-tax cut would risk fuelling inflation; Hunt could argue that cutting public spending would offset that effect.
The chancellor said this weekend he would take “difficult decisions” on welfare spending to create space for cutting taxes. Ministers have already said they want to reduce benefit spending by requiring people on incapacity support to look for work they can do from home, as part of a move to plug gaps in the labour market.
Many Tory MPs have urged Hunt to cut inheritance tax. That option was on the table but government officials say this has now been delayed until next year, either for the spring Budget or the Tory election manifesto.
Rachel Reeves, shadow chancellor, told the BBC on Sunday that cutting inheritance tax was “not the right priority” and Labour would not support it. Some Tory MPs fear it would be attacked by Labour as “a tax cut for Jeremy and Rishi”.
Additional reporting by Sam Fleming in London
