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Improved UK fiscal position gives Hunt room for Autumn Statement giveaways

In September, chancellor Jeremy Hunt said that making tax cuts would be “virtually impossible” in his Autumn Statement. With just three days to go, Tory MPs believe they are a racing certainty.

Two big things have happened since Hunt issued that warning. The first is that a “stealth” tax raid on middle Britain has helped to improve the UK’s fiscal position, possibly by about £20bn, offering the chancellor more room for giveaways.

The second is that prime minister Rishi Sunak and the Conservative party are floundering in opinion polls, typically trailing Labour by 20 points or more, while downbeat Tory MPs are demanding a fiscal pick-me-up now.

Decisions that were being pencilled in for the Spring Budget, including a cut to income tax, could be hurried forward by Hunt to appease his increasingly restive colleagues in the Commons who fear defeat in the general election expected next year, according to officials.

“It feels like we’re in too high a gear, going up a hill,” said one influential Tory MP. “We are losing momentum and we have been since the spring.” Sunak’s Tory conference speech, the King’s Speech and cabinet reshuffle failed to achieve the political “gear shift” craved by many of his colleagues.

Hunt had been urged by some Tory MPs to cut inheritance tax this week, a levy which is broadly unpopular, according to polls, even if it is only paid by fewer than 4 per cent of all estates.

Tory election chief Isaac Levido believes that cutting inheritance tax is a policy that will mobilise Tory voters in the shires, traditional Conservative leaning counties in England, to turn out to vote next year, according to party strategists.

But government officials said cuts to inheritance tax would be deferred until next year. Some in the Treasury admitted to being spooked by the idea of drawing up a move that would directly benefit wealthy politicians including Sunak and Hunt during a cost of living crisis.

Instead, the prime minister and chancellor are looking at other tax cuts, notably on the business side. But a reduction in the basic rate of income tax that would benefit workers, promised by Sunak last year, would have more “rabbit out of the hat” appeal.

The chancellor on Saturday suggested that personal tax cuts could be funded by welfare reductions, an argument which could help him counter the claim that these would boost overall demand and fuel inflation.

Cutting income tax would also give him a chance to score a political point against Labour, by showing the Tories will use a “carrot and stick” to get people back into work, and let them keep more of their wages when they do find a job.

Hunt suggested to Sky News that tax cuts would help to boost economic growth: “I think it’s important for a productive, dynamic, fizzing economy that you motivate people to do the work, to take the risks that they need,” he said.

The Tory right, bruised by a reshuffle that brought the return of the centre-right David Cameron as foreign secretary, may need more than a tax cut [though] as an offering. “If they think this alone somehow shuts up the right, they are politically dumb,” said one Tory MP from the “Red Wall” of traditionally Labour-voting northern constituencies that went Tory at the last election.

Part of the reason for the government’s change of mood around the Autumn Statement has been the better news on the fiscal front.

In March the Office for Budget Responsibility, the fiscal watchdog, projected the Treasury’s headroom against its debt-reduction rule would be £6.5bn. Forecasters including Capital Economics and JPMorgan are now saying it could exceed £25bn. That would be close to the average amount of headroom chancellors have enjoyed since the OBR was brought into being in 2010.

The improvements are being driven by persistent inflation feeding through into higher government revenues, outweighing negative factors such as rising debt interest payments. In the fiscal year to date, borrowing has come in £19.8bn lower than the £101.5bn forecast by the OBR.

The risk is that fiscal giveaways like income tax reductions could fuel inflation, which Hunt has vowed to avoid. Whereas a measure aimed at bolstering capital investment by companies could be justified as a means of improving the country’s supply capacity, reducing income tax might end up injecting demand into the economy if not offset by deficit-reduction measures.

The true risks to inflation will depend heavily on the scale of any giveaway, said Paul Johnson, director of the Institute for Fiscal Studies. A contained measure like lopping a penny off income tax would be relatively modest in the context of the overall economy, even if from the Bank of England’s point of view it would be a “push in the wrong direction”.

The bigger problem, Johnson argued, concerns fiscal policy. When there is good news on the public finances, the government tends to use it to cut taxes or lift spending, he said, whereas with bad news they push the country’s debt problem “further into the long grass”.

Torsten Bell, managing director of the Resolution Foundation, pointed out there were still income tax rises on the horizon as a result of the government’s multiyear freeze to income tax allowances and thresholds — a so-called “stealth tax”. 

That process of “fiscal drag” is set to reach £40bn a year by 2028 due to inflation, according to recent estimates from the Resolution Foundation. If the chancellor wanted to ease the burden of personal taxes, Bell said, he should start by reconsidering some of the increases he had already planned. 

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