Just two months ago, Jeremy Hunt warned tax cuts were “virtually impossible”. On Wednesday the UK chancellor made a dramatic political pivot as he unveiled £20bn of tax cuts in the Autumn Statement.
Downing Street strategists had originally planned that the Autumn Statement would be a workmanlike, “growth-focused” event, setting up a tax giveaway in the spring Budget ahead of the general election.
All that changed on Wednesday. Hunt’s eye-catching tax measures, including £10bn of national insurance cuts set for January 6, raised Tory speculation that Rishi Sunak is targeting an unlikely spring 2024 election.
Much depends on the opinion polls. Sunak is unlikely to announce an election with the Conservatives currently trailing by 20 points, but he could have that option if polls narrow substantially in the next few months.
But turning things around politically against a still-gloomy economic backdrop will be a challenge, as voters continue to live with stubborn inflation and a remorseless increase in overall tax levels driven by a continued freeze in personal tax thresholds.
The independent Office for Budget Responsibility pointed out that, in spite of Hunt’s tax cuts, the tax burden will still rise in each of the next five years to a post-war high of 38 per cent of gross domestic product.
“Even after today’s tax cuts, the tax burden reaches its highest level for 70 years — up by well over £4,000 per household on pre-pandemic levels,” said Torsten Bell, director of the Resolution Foundation.
There was little doubt before Wednesday that Sunak would spend most of the £30.9bn fiscal headroom that emerged against the government’s main fiscal rule that debt must fall as a share of GDP in the fifth year of the forecast.
The question was whether announcements on tax cuts would happen now or in Hunt’s Spring Budget, which will set the scene for an election most Conservative MPs still expect to happen in autumn 2024.
A number of factors persuaded Hunt and Sunak to start spending the headroom now. The principal reason for the change is the fact that the Tories find themselves in a deep political hole.
Sunak’s team spoke in the summer of the events through the autumn that would help turn the political tide: the prime minister’s party conference address, the King’s Speech, a reshuffle and the Autumn Statement.
The first three have passed and Sunak’s party still trails Labour heavily in the polls. “People just aren’t listening any more,” said one Tory MP.
Another senior Tory MP with Sunak’s ear said: “What people want now is something that breaks the logjam, that reorders things. We should have changed gear back in May, we definitely need to do it now.”
With the Tory right in restive mood, particularly after the return of the centre-right David Cameron to the cabinet as foreign secretary, tax cuts were an obvious way to win some breathing space with Conservative MPs.
The economics had also shifted. Inflation fell in October to 4.6 per cent, meeting Sunak’s target of halving inflation during 2023 and allowing him to claim that the economy had reached a “turning point”.
However, as Bank of England governor Andrew Bailey reminded MPs on Tuesday, inflation is still stubbornly well above the official 2 per cent target and interest rates are likely to be at an elevated level for some time.
Hunt was also conscious, according to Tory insiders, that while his Autumn Statement should avoid fuelling inflation — the OBR agreed it would not — he had to boost the UK’s feeble growth rate.
The Treasury and the independent forecasters were in regular dialogue about how many of Hunt’s measures could be “scored” as raising Britain’s growth potential. Hunt billed his tax cuts, including a £11bn tax cut for business, as major supply side measures.
The risk of a recession remains a political threat to Sunak and Hunt that they would rather avoid. The BoE is forecasting zero growth in 2024, though the OBR forecasts 0.7 per cent growth.
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The question then arose: what kind of tax cuts? Inheritance tax cuts, long mooted by Downing Street as an eye-catching offer to middle Britain at the next election, were considered as an option for the Autumn Statement.
But many Tory MPs, particularly from northern “red wall” seats where hardly anyone died with an estate above the effective IHT threshold of £1mn for married couples, were highly resistant to any cut in the tax in the Autumn Statement.
“It was made clear in no uncertain terms to us we shouldn’t do it now,” said one ally of Sunak.
The offer of an IHT cut, or its eventual abolition, is being held back for the spring Budget or as a possible Tory manifesto offer, said Treasury insiders.
National insurance, paid by workers and employers, was chosen this time, though Tory MPs admit that NI cuts do not have the same “salience” as a reduction in the headline rate of income tax.
But for Hunt, the offer of tax cuts now, and the prospect of more to come, is the most visible expression he can muster to back his claim that the economy is “back on track”.
Many Tory MPs are looking to the chancellor in the spring to start cutting the 20p basic rate of income tax — a policy to which Sunak publicly committed before he become PM last October — to start reversing the tide of tax rises introducing during this parliament.
The OBR gave Hunt £13bn of fiscal headroom after Wednesday’s Autumn Statement, a figure that assumes spending cuts after the election that many economists consider unrealistic.
Whatever the headroom figure is in the spring, Sunak and Hunt will be looking to raid most of it again for pre-election tax cuts. As one Tory strategist bluntly told the Financial Times: “We’re going to max out the headroom — we’re not going to leave it to the other side.”