On a journey: Chancellor Jeremy Hunt
Jeremy Hunt is on quite a journey. Having arrived at No 11 in the midst of a fiscal and bond market emergency after Kwasi Kwarteng’s short-lived ‘Growth Plan’ of September 2022, he embarked on a course designed to demonstrate that Britain was not a basket case after all by reversing the Truss-Kwarteng revolution and more.
Almost all tax cuts were redacted and critically, Rishi Sunak’s freeze on income tax, inheritance tax and capital gains tax thresholds produced a revenue bonanza.
Instead of the £8billion of extra income a year originally projected, the number swelled to £52billion a year.
The higher cost of living was unwanted and its impact on the interest rate bill for government borrowing horrendous.
But it is the gift which can only give more as the Tories head into what the polls tell us is an unwinnable election.
Hunt has switched from being a captive of Treasury orthodoxy to a preacher for supply side economics.
Questioned in Davos as to whether he would be prioritising public services and deficit reduction in his March 6 budget, the Chancellor praised low tax economies as being ‘more competitive and dynamic’.
It was a message which could have come out of Donald Trump’s campaign guide in the US. Not a comparison Hunt would welcome.
The speed of the Chancellor’s Damascene conversion is remarkable.
Earlier this month on a trip to OpenReach in Crawley, Hunt was reluctant to speculate on taxes beyond the benefits of his two percentage point cut in national insurance and ‘full expensing’ relief on capital spending by corporations. When the possibility of further tax cuts in the budget was raised, the Chancellor went into a riff about how headroom, the extra fiscal space for spending or tax cuts, dances around and it was impossible to make pledges about the future.
A couple of matters have changed in two short weeks. The first and most significant is the realisation on Downing Street that the Conservatives are in the last-chance saloon. A You Gov poll in the Daily Telegraph, showing a Tory wipe-out including Hunt’s own Surrey seat, was a shocker. Lower taxes looked like the best prospect for challenging Labour with its still unfunded £28billion green prosperity plan.
Secondly, the public finances are improving. Officially, the headroom, even after £20billionn of autumn budget tax changes, is estimated to be around £13billion. Lower borrowing costs, using Office for Budget Responsibility calculations, could deliver a further £14billion – raising the headroom to £27billion.
That’s not the end of it. Shrinking inflation also reduces the cost of an indexed welfare budget and could yield a further £4billion in savings. Admittedly, lower inflation could also cut the windfall caused by stealth taxes. Nevertheless, the Chancellor should have the war chest to enable his refreshed low tax agenda.
The question then becomes when to deliver it. Working taxpayers should start to see the benefits of the national insurance cut in this month’s pay slips. However, by the time the election comes around in the autumn, it will be a useful manifesto line but a distant memory. Corporation tax relief is not going to have many ordinary citizens cheering from the side lines.
One solution to the timing problem and keeping tax reductions fresh in people’s minds is to have two budgets/financial statements before the election – or the John Major solution. The former Tory PM helped to salvage the 1992 election, when a narrow Labour victory was expected, by squeezing in an early tax-cutting autumn statement ahead of election day.
Hunt too could have the opportunity for two expansionary budgets before the election. The issue then becomes what would be the biggest vote catchers.
Inheritance taxes impact a small cohort but are deeply unpopular, and ever more so as baby boomers, enriched by property windfalls, meet the grim reaper.
Restoring capital gains tax allowances should encourage savings and entrepreneurs. Ending the tourist tax would assist retail and hospitality and bring the curtain down on an act of self-harm.
The best and most headline grabbing, an old fashioned cut in the basic rate of income tax, might win the most votes ahead of an election. Emptying the treasure chest could be regarded as irresponsible. Given the state of the polls, it may be the only option.
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