Jeremy Hunt raids reserves to fund pre-election tax cuts

London — British chancellor of the exchequer Jeremy Hunt cut taxes for workers in a bid to woo voters back to Prime Minister Rishi Sunak’s unpopular Conservatives ahead of an expected 2024 election, but had to slash his emergency reserves to cover the cost.

Hunt lowered the rate of social security contributions (NICs) by two percentage points for the second time in under four months, putting an average £900 a year back in the pockets of workers from the two reductions.

“Because of the progress we’ve made, because we are delivering the prime minister's economic priorities, we can now help families not just with temporary cost of living support but with permanent cuts in taxation,” he told parliament.

Hunt announced other measures on Wednesday to help voters including freezing fuel duty for a 14th year, the extension of a freeze in duty on alcoholic drinks and the continuation of a support programme for low-income households.

The government’s budget forecasters estimated that he now had just under £9bn of “fiscal headroom” — the room available to the government for future spending or tax cuts while still meeting its target of bringing down Britain’s tax burden at the end of a five-year period. The Office for Budget Responsibility (OBR) said the headroom represented only “a small fraction” compared with the risks that Britain’s economy does not follow its central forecasts.

Paul Johnson, the head of the Institute for Fiscal Studies think-tank, said Hunt’s plans were dependent on borrowing forecasts that showed the budget deficit narrowing sharply.

“Take this with a pinch of salt. Will depend on implementing extremely tight spending plans which will imply cuts for many public services,” Johnson said on social media platform X.

“What we got again today was tax cuts today, paid for by some completely uncertain spending plans for the future.” To help make his sums add up, Hunt extended by one year a windfall levy on energy firms’ profits, raised a tax on e-cigarettes and vapes and increased a duty on tobacco. He also said non-economy flights would be hit with higher duty. In possibly the most politically sensitive change, Hunt said he would charge “non-domiciled” people living in Britain for more than four years tax on their income from abroad.

The opposition Labour Party has proposed a similar measure.

Labour leader Keir Starmer, who is hoping to end 14 years of Conservative dominance in Westminster, went on the attack as Hunt ended his speech, saying the budget plan was the “desperate act of a party that has failed”.

Hunt opted not to make further savings by tightening the squeeze on future public spending that many analysts say already looks implausible and represents a tough inheritance for whoever wins the next election. Some cities and towns have effectively gone into bankruptcy, the backlog of cases in courts hit a record high last August and a think-tank found last year that performance in eight out of nine major public services had declined since 2010.

Slow growth

Hunt said Britain's budget forecasters were now forecasting the economy would grow by 0.8% this year after a recession in the second half of 2023.

The new figure for growth was slightly stronger than the 0.7% projected in the OBR's previous outlook in November.

The OBR now projects economic output to expand by 1.9% in 2025 and by 2% in 2026, Hunt said, compared with its previous expectations for growth of 1.4% and 2.0% in 2025 and 2026.

Hunt and Sunak have promised voters they will get the economy growing more quickly as they try to overhaul Labour’s huge opinion poll lead.

The pair raised taxes sharply on taking office in 2022 to quell mayhem in the bond market sparked by the sweeping tax-cutting plans of Sunak’s short-lived predecessor Liz Truss.

With Britain's debt burden the heaviest since the 1960s, and mindful of that market chaos just 18 months ago, Hunt has resisted calls from Conservative colleagues for major giveaways and promised to stick to his plans for less new borrowing.

But he said on Wednesday that inflation's fall from more than 11% means “we can now help families not just with temporary cost of living support, but with permanent cuts in taxation”.

The OBR now expects Britain’s inflation rate to fall below 2% in the coming months, Hunt said.

Reuters