Due on March 6th is the Budget. Since that’s also my mother’s birthday, my preparations will consist of desperately scanning the Laura Ashley website to work out what to get her. Jeremy Hunt’s efforts to give the public finances a pre-election polish are a doddle by comparison.
Our two exercises are more similar than they might first appear. We both are aiming to do the same thing: create the maximum satisfaction for our chosen audience within our respective financial constraints. Yes, the Chancellor has a little more to play with. But the principle is the same.
I’m tactful enough not to debate whether Tory MPs are easier to please than my mother. But we do at least know what the backbenches are after on March 6th: tax cuts. Party conference, a Cabinet reshuffle, a King’s Speech, and an Autumn Statement have passed as Labour’s lead has grown. The dwindling number of MPs not yet departed in pursuit of more lucrative climes are convinced relieving the burden on voters is the only way to shift the dial.
ReformUK are now committing to raising the 40p income tax threshold, cutting stamp duty, inheritance tax, and corporation tax, and providing tax relief on private education and healthcare. The party may never possess any MPs – watch this space – and has the benefit of never having to worry about implementing such pledges in power. But post-Wellingborough and Kingswood, MPs will be nervous at Richard Tice’s blandishments for Middle England.
Bolstered by the news that borrowing up to January’s end was £9.2 billion less than expected – based on a record surplus and lower borrowing costs – and suggestions Hunt has at least £15 billion in fiscal headroom to splurge, backbenchers have a long wish list of potential cuts. A penny drop in the basic rate of income tax. Abolishing inheritance tax, or the child benefit tapers. Ending the tax threshold freeze. All at once, if possible.
I’m sympathetic. I hope readers have not taken my unwillingness to move on from Trussonomics as a sign that I am comfortable with our tax burden reaching its highest since the Second World War. That Labour can even aspire to claim they are the party of lower taxes is a lamentable state of affairs. But what I find even more worrying is the air of unreality surrounding the tax cut debate.
There used to be a link for most Conservatives – encouraged by the Iron Lady’s willingness to treat the public finances as prudently as her own – between cutting spending and cutting taxes. Nigel Lawson’s plethora of cuts in his 1988 Budget only came after the public finances had been wrestled under control. Upon reaching Downing Street, this was an ethos Sunak and Hunt sought to embody.
Trussonomics seemed to prove that the deficit was not big enough to look after itself. Markets had been spooked, not enthused, by the claim personal tax cuts could juice growth enough to be self-financing. Ignoring the Office for Budget Responsibility was a no-no. In the future, cuts must be accompanied by spending reductions. Yet even though Hunt seems more interested in juicing the housing crisis than keeping spending down, cuts are on their way.
The public finances were in a better place than expected in November, giving the Chancellor more leeway with the OBR to reduce the burden and be within his target of having debt falling as a share of GDP within five years. That’s why Hunt could announce his national insurance reductions.His autumn package cost around £20 billion.
Similar freedom does not appear to be present now. As Robert Colville has highlighted, the Chancellor finds himself wedged between a gloomy bond market and falling inflation. Halving the latter was one of Sunak’s five pledges. But the combination of high inflation and frozen thresholds provided much-needed extra cash for the Treasury. Without that, Hunt’s freedom for manoeuvre is greatly squeezed. March’s mood music is more sombre than November’s.
Will this put Hunt off cuts? Unlikely. This should be the last fiscal event before the election, and probably Hunt’s last altogether. Even if the Tories were re-elected, he was not Sunak’s first choice, and others have both Number 10’s ear and an eye of Hunt’s job. He has a clear incentive for cuts that appease Number 10. MPs and voters are useful add-ons.
But any set of cuts would be disingenuous. Any headroom would be based on earlier tax hikes and further increases and cuts after the election. Hunt introduced £20 billion’s worth of rises in 2023-24, whilst scheduling £17 billion for after the election, including continued threshold freezes.
Suggestions that the Chancellor could reduce the one per cent real terms increase in public sector spending after the election to only a 0.75 per cent rise would mean a 20 per cent reduction in spending from departments not protected from cuts according to the Resolution Foundation. These could include the Home Office, Justice, and Levelling-Up. That’s down further from a 17 per cent cut already pencilled in by 2028-29.
Hunt might hope to lay a trap for Labour. If Keir Starmer wants to avoid matching those swinging cuts, he would have to explain which taxes he plans to raise. The Chancellor could revive the ‘Tax Bombshell’ pitch that Starmer’s scrapping of Labour’s £28 billion green boondoggle was supposed to kill off.
Laying that trap relies on a tacit admission on Hunt’s part. He can spaff every spare penny now on cuts in a desperate attempt to win the Conservatives re-election. Yet, if Chancellor after it, he would struggle just as much as Labour to implement the cuts he has promised. If his Budget pitch fails to woo voters, he won’t have to worry. But if the Tories were re-elected, Hunt or his successor would fall into a trap of his own making.
The Autumn Statement’s national insurance reductions have made little of an impression on the electorate. But with GDP per head in decline for almost two years, it will take a far more noticeable change to the average voter’s finances for them to overcome their natural resistance to saying thank you to a party that has been in power for fourteen long years. Hunt must be confident that he is leaving his tab for Starmer.
Tory MPs cheering him on as he does so are showing how utterly uninterested they have become in the health of the public finances. As Ross Clark has pointed out, when David Cameron and George Osborne embarked on their deficit-reduction programme in 2010, debt was at 70 per cent of GDP. Post-Covid, it is at 100 per cent. Few are interested in getting it down. After Brexit and Boris Johnson, austerity has become a dirty word. But demographic disaster looms.
The Government is shattering Edmund Burke’s compact between the generations based on an increasingly dogmatic faith in tax cuts at all costs from some Tories both in and out of Parliament. But the buck can only be passed for so long, as the days tick down until the next global financial crisis. When it comes, the reckoning will be all the harsher for neglect today. Is that worth taking a penny off of income tax?