Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Jeremy Hunt has left a £20bn hole in the budgets of strained public services by favouring tax cuts over higher public spending in his Autumn Statement, the fiscal watchdog said on Thursday.
Richard Hughes, head of the independent Office for Budget Responsibility, said Hunt had in effect found £20bn for tax cuts by deciding not to protect public services against the rising costs of inflation.
The UK chancellor on Wednesday announced a £9bn cut in national insurance contributions by reducing the main rate by 2 percentage points to 10 per cent and an £11bn cut in business taxation.
Hunt argued that this would boost the long-term performance of the economy. However, the OBR chief said in the short term it would heap pressure on the country’s public services.
He said the “real spending power” of government departments had fallen by about £20bn because the inflation forecasts that budgets were based on had turned out to be too optimistic.
Hughes told the BBC’s Today programme: “In some ways, by not changing the level of public spending in this Autumn Statement, that has given him £20bn to spend on tax cuts.”
Hunt argued on the same programme that he had made a choice to favour tax cuts, arguing that in the long term the country could only have good and sustainable public services if the economy grew.
“I could have done a lot of things with the headroom I have,” he said. “But as a Conservative I believe lower taxes are how we grow the economy.”
He acknowledged that the overall tax burden was continuing to rise, which Hunt said was largely because of the costs of paying back debt incurred during the Covid-19 pandemic and the energy crisis. The chancellor said he had “made a start” in reversing that tide.
Asked why he did not insulate public services against higher than expected inflation, Hunt said: “If, instead of doing those big tax cuts to help business grow, to help grow the economy, I put money into public spending, what would we have been talking about today?
“We would be saying the tax burden is still going up, that’s making the economy less competitive, and that means there’s less money for the NHS, police and schools in the long run,” he added.
Rachel Reeves, shadow UK chancellor, said Labour would vote for the two big tax cuts contained in Hunt’s Autumn Statement.
Reeves said Labour would “absolutely” vote for a 2p cut in the rate of national insurance contributions and for the £11bn “full expensing” tax break for company investments in plant and IT.
But she conceded that an incoming Labour government would be confronted with strained public services, which are struggling with squeezed budgets and the effects of inflation.
Conservative strategists say they plan to frame the general election as a choice between Tory tax cuts and what they claim will be a Labour plan to increase public spending, funded by higher taxes.
Reeves insisted Labour’s only tax-raising plans involved closing “loopholes” around private schools, private equity bosses and non-domiciled residents in the UK, even though they would raise only limited amounts of money.