The chancellor will make plenty of positive speeches during his autumn statement on Wednesday, but it will be a budget event full of illusory gains.
The government is on track to borrow less than planned, leading to a fantasy that Chancellor Jeremy Hunt has more room to cut taxes than he actually does.
This is a fantasy because these gains on borrowing are largely the product of high inflation, which has bolstered tax revenues. The government has not yet admitted it, but inflation will inevitably also lead to higher spending.
This means that Hunt’s room for maneuver is actually limited if he is to achieve his goal of reducing debt as a proportion of gross domestic product (GDP).
Even if interest rates, which were higher than expected, will weigh on public finances, the exceptional fallout from the tax increase, supported by inflation and wage growth, will more than offset this phenomenon. The Office for Budget Responsibility (OBR) is likely to show that the government’s headroom against this target has increased from £6.5 billion to around £13 billion.
Jeremy Hunt They will want to view this as a victory, while tempering expectations for tax cuts. His message will be that public finances are improving under this government, but are in too bad a state to allow tax cuts.
This is where the internal political struggles begin. Many members of his own party want him to use this leeway to cut taxes. They are disturbed that a Conservative government has overseen a growth in the tax burden that has reached its highest level since the post-war period.
Among the most egregious of these tax rises is the threshold freeze, a stealth tax that will see taxpayers pay £40 billion more a year by 2028. It has dragged down millions of public sector workers, including teachers and nurses, towards a higher tax bracket. .
Tensions over taxation have been simmering within the party and are likely to flare up again as Hunt is unlikely to make any big gifts. The government insists that the priority must be to reduce inflation, as any tax increases could push up inflation. However, with the target of halving inflation now achieved, MPs will wonder when tax cuts can begin.
Hunting and Rishi Sunak are sensitive to this and will probably throw a bone or two. Downing Street is looking for options that are relatively inexpensive and less likely to increase inflation.
A number of measures are being considered, including the removal of inheritance tax or a reduction in the rate from 40% to 20% on inheritances above £325,000. The government could also cancel a planned increase in stamp duty. Together these policies would cost around £5.2 billion. The chancellor is also expected to cancel a planned 5p rise in fuel duty from April next year, costing £6bn.
Thus, any freebie would quickly eat up the room for maneuver, at a time when public spending would inevitably increase. Departmental budgets are set in cash and high inflation means the cost of paying prison guards and running the courts has increased. Without substantial increases, public services will face pay cuts in real terms.
Under current plans, unprotected departments would see their purchasing power reduced by 16% between 2022-23 and 2027-28, which would correspond to a pace of cuts similar to that implemented by George Osborne in the early 2010s.
The Resolution Foundation, a left-wing think tank, called this scale of budget cuts an “unworkable” “fiscal fiction”.
The opposition will keep a watchful eye on this issue and will be quick to denounce any signs that the country is returning to a period of austerity. He will also quickly tackle any government tax increase plans – and there will be a number of them.
The tax thresholds are likely to remain frozen until 2029, a policy which could raise an extra £6bn. The Treasury will also crack down on benefits, increasing them in line with October’s inflation rate of 4.6% instead of September’s figure of 6.7%. This could save £2 billion. A change to the triple lock calculation for pensions could raise £600 million.
So, despite all the upward revisions to the figures from the OBR, this is a fiscal event that is unlikely to inspire. There will be some marginal adjustments and big debates over plans to boost economic growth.
However, the government will probably want to keep things dry for the March budget. Unfortunately, this may not be enough to satisfy Conservative MPs, who are now hungry for tax giveaways.
Chancellor Jeremy Hunt will appear on Sky News’ Sunday Morning show with Trevor Phillips from 8.30am this morning.