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UK households are set to end up in a “tax sandwich” where potential cuts at Jeremy Hunt’s upcoming Budget sit between big earlier tax increases and further rises after the general election, a leading think-tank has warned.
The Resolution Foundation said on Wednesday that Hunt should have the budgetary room for manoeuvre to push through a round of cuts to personal taxes such as a 1p reduction in income tax in his March 6 budget.
But the positive impact of any such reductions needed to be set alongside hefty tax rises that have already been implemented and that are set to come in future, the think-tank added.
“Juicy tax cuts in this election year are sandwiched between far bigger tax rises already introduced last year,” said James Smith, research director at the foundation.
“And highly unusually the government has already announced plans for a chunky package of tax rises that will come into effect after polling day,” he added.
Hunt introduced £20bn of tax rises in the 2023-24 fiscal year, including freezing personal tax thresholds and higher corporation tax, the think-tank said. On top of that, some £17bn of pre-announced tax rises will hit home during the next parliament, including continued threshold freezes and a planned stamp duty increase.
The chancellor was due to receive the latest round of fiscal forecasts from the Office for Budget Responsibility on Tuesday as he prepares a Budget that Tory backbenchers hope will include tax cuts to reduce Labour’s polling lead.
Although Hunt had talked up the prospect of tax reductions, he has recently sought to damp expectations, stressing that any cuts will be done in a “responsible and sensible way”.
A critical variable will be the size of the budgetary “headroom” he has against the government’s crucial fiscal rule, which requires public debt to be falling as a share of gross domestic product in five years.
This was estimated at £13bn by the OBR in November after the chancellor announced tax-cutting measures that will cost close to £20bn a year.
The foundation estimated that factors including lower government borrowing costs since November forecasts should give Hunt as much as £23bn of headroom to use in his Budget.
Other forecasters predict a more modest figure. Capital Economics, a consultancy, said on Tuesday the headroom will be £15bn. Even this smaller figure hinges on steep post-election spending cuts that analysts warn will be difficult to deliver.
Treasury insiders said last week’s OBR forecasts put the fiscal headroom at about £13bn and that there had not been any “marked market changes” in the last week to significantly change that figure.
They added Hunt’s priority remained to use whatever fiscal room he had to offer personal tax cuts to the largest number of voters possible: namely either a cut in income tax or national insurance rates.
Both Capital Economics and the Foundation said the chancellor could be tempted to push through up to £10bn of tax cuts in the budget given the likely fiscal outlook.
Among the options are a 1p reduction in the basic rate of income tax from 20p in the pound at a cost of £7bn in 2027-28. Alternatively, he could lift the tax-free allowance for income tax in line with inflation, cancelling a freeze planned for 2024, in a move that would carry a similar price tag for the exchequer.
Following up on November’s decision to reduce national insurance contributions with a further 1p reduction in the main rate of 10p in the pound for employees would cost £5bn. In addition, fuel duties are likely to be frozen again, at a cost of £6bn.
The foundation said even tax cuts of that scale, on top of the November reductions to business and personal taxes, would not stop the UK’s tax burden reaching a postwar high over the coming five years.
Pre-election tax cuts would also only be possible on the back of “implausibly” big real-terms reductions in departmental spending after the election, Capital Economics warned. “This is a classic case of kicking the fiscal can down the road,” said Paul Dales, its chief UK economist.
Richard Hughes, the chair of the OBR, has criticised the lack of detail underpinning those spending assumptions. “Some people refer to that as a work of fiction — that’s probably generous given that someone has written a work of fiction,” he said in January.
The government has pencilled in plans for day-to-day public service spending to rise by 1 per cent in real terms after the election.
Given the government’s efforts to prioritise areas including the NHS, defence and education, that implies real per-capita spending cuts of about 17 per cent for unprotected departments such as the Home Office, justice and local government by 2028-29, according to the foundation.
A Treasury spokesperson said: “Whilst it’s too early to know whether tax cuts will be affordable in the upcoming spring Budget, our tax burden remains lower than any major European economy, inflation has more than halved and the average earner will save £450 a year thanks to this year’s cut to National Insurance.”