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Jeremy Hunt is looking at cutting inheritance tax and business taxes in next week’s Autumn Statement, as ministers confirmed he would have more fiscal “headroom” than expected for giveaways.
Hunt is under significant pressure from Conservative MPs to deliver some “retail” tax cuts next week for voters, alongside business-friendly supply side reforms intended to boost growth.
The chancellor will on Friday receive final forecasts from the Office for Budget Responsibility, the independent fiscal watchdog, that will show that buoyant tax receipts have increased his leeway for tax cuts.
“The economy is more cheerful than we thought and we have more headroom than we thought,” said one minister. “There’s enough there for Jeremy to do something eye-catching.”
Allies of Hunt said no final tax decisions had been made and that he and Prime Minister Rishi Sunak would finalise the Autumn Statement after receiving the final OBR forecasts.
At his spring Budget, the OBR said Hunt had £6.5bn of headroom against his target of cutting debt as a share of gross domestic product in the fifth year of the forecast.
The Resolution Foundation think-tank has forecast that could rise to £13bn, although some economists believe it could be considerably bigger.
Tory MPs want Hunt to spend the extra headroom to lift the party’s dismal poll ratings ahead of the next general election; a YouGov poll on Thursday put the opposition Labour party on 44 points and the Conservatives on just 21.
Hunt wants to boost Britain’s growth without fuelling inflation, which has fallen to a two-year low of 4.6 per cent. “The biggest fear in the Treasury is doing anything which forces the Bank of England to keep interest rates higher for longer,” said one government official.
The chancellor has said he wants to make the government’s flagship tax break for business — so-called full expensing — permanent, when the fiscal position allows.
But some Tory MPs argue that the policy, which would cost about £9bn a year initially, would do little to ease their immediate predicament: how to win an election expected to be held in autumn 2024.
The full expensing capital allowance scheme — which allows businesses to deduct the full cost of an investment in IT equipment, plant or machinery the year it is incurred from the tax on their profits — is due to expire in 2026.
Government insiders said Hunt was considering both a one-year extension and making full expensing permanent. Treasury officials believe neither would be inflationary.
But one minister warned that changes to the full expensing regime would not save the Tory party at the next election. “It’s not sexy in a retail way,” the minister said. “The Treasury is being too technical.”
Meanwhile Hunt had been looking at a cut to inheritance tax for some time, government insiders said. Polling suggests the levy is unpopular with voters, and cutting it is also deemed to be largely non-inflationary.
“When you inherit an estate, you don’t tend to liquidate it straight away and spend all the money,” said one official close to the Autumn Statement discussions.
Tory strategists have for some time been discussing eventually scrapping IHT, possibly as a manifesto commitment. Hunt is under pressure to start cutting the tax next week or in the spring Budget.
The levy, set at 40 per cent on the value of an estate above a threshold of £325,000, is expected by the OBR to raise £7.2bn in 2023-24. Asked in the House of Commons on Tuesday about a possible IHT cut, Hunt said MPs would have to “wait until next week”.
Any unused threshold may be transferred to a surviving partner, increasing the combined threshold to £650,000. There is an additional transferable £175,000 “residence nil-rate band” when a home is left to children or direct descendants.
Hunt’s fiscal fortunes have been bolstered in the short term by better than expected receipts of income and corporate tax, alongside interest payments that have undershot OBR forecasts from March.
As a result, the UK government has borrowed £81.7bn in the current fiscal year, according to the Office for National Statistics, less than the £101.5bn forecast for the period by the OBR.
Higher inflation and wages could, according to some forecasters, feed through to lower-than-expected borrowing further out in the OBR’s outlook, helping Hunt’s headroom.
Based on its own projections, Capital Economics has predicted that the headroom against the UK’s public debt rule could approach £29bn, although it expects the OBR to come up with a smaller number.
However, Ruth Gregory, deputy chief UK economist at the consultancy, stressed that even modest changes to the OBR’s forecasts would be sufficient to “wipe out the headroom”.
“Even a small pre-election giveaway could leave the chancellor’s fiscal rules on shaky ground,” she said.