Jeremy Hunt will be unable to fully reverse the ‘fiscal drag’ stealth tax that drags millions of earners into higher tax thresholds in the Budget – meaning despite any tax cuts the Conservatives will still have presided over the biggest tax-raising parliament on record.
The Chancellor is also leaning away from inheritance tax cuts, i understands, as a Treasury source said that with limited cash, the priority would be “sensible tax cuts, smart tax cuts hat grow the economy”.
The tax on people’s assets when they die only affects around 4 per cent of estates and cutting it is not seen as a major growth measure, even though it would be relatively cheap to scrap.
Mr Hunt has been given only around £14bn of spare cash in forecasts by the fiscal watchdog, leading the source to concede that reversing “fiscal drag” that has pulled millions into higher tax thresholds is highly unlikely this Spring as it would cost more than £40bn.
Overall, frozen income tax thresholds will drag four million more workers into paying income tax over the next five years, three million more workers into paying the higher 40p rate, and 400,000 into paying the top 45p rate, the Office for Budget Responsibility (OBR) said in November.
The latest OBR forecast delivered to Mr Hunt as he prepares for the Budget is meanwhile broadly in line with Treasury analysis that he will only have £14bn of so-called “headroom” at the next Budget to increase borrowing without breaking his fiscal rules, meaning only modest tax cuts will be possible.
The latest assessments and Mr Hunt’s warning that he is unlikely to have “the same scope for cutting taxes in the spring Budget that we had in the Autumn Statement”, when he spent around £9bn a year cutting national insurance by 2p, are likely to disappoint some Tory MPs.
One senior Tory MP urged the Chancellor to “ease the tax burden on squeezed households”.
“Fiscal drag is affecting too many and as the OBR notes it’s sucking in more people.
“This needs to change.”
But the Institute for Fiscal Studies’ deputy director Helen Miller told i that Mr Hunt may be able to move some tax thresholds.
“He could say I have X billion pounds and I will raise the personal allowance and higher rate threshold by whatever it takes to hit that figure,” she said.
But Ms Miller warned: “It’s the highest tax burden since the Second World War and the highest tax-raising parliament on record.
“Unless headroom really surprises on the upside or he pencils in really big spending cuts and goes mad, I don’t see anything happening that’s going to make either of those things untrue.”
Ms Miller, who heads up the IFS tax sector, also suggested an inheritance tax cut was unlikely.
“It’s not one the OBR will say: there’s going to be a growth effect.
“So if he’s going for well-targeted tax cuts for growth, I don’t see inheritance tax falling into that bracket.”
Conservative former minister Sir John Redwood argued that Mr Hunt has more money to play with than the OBR forecasts.
“There is more scope to cut taxes,” he said.
“Debt interest costs will tumble as inflation drops. Public sector productivity can be got back up to closer to 2019 levels. A big cut in legal migration greatly reduces the need for more subsidised homes and public service capacity. The Bank of England should stop selling bonds at big losses which the taxpayer has to pay. I have suggested at least £30bn of extra headroom.”
A Trussite Tory source meanwhile questioned Mr Hunt’s messaging, which has moved within two weeks from channelling Margaret Thatcher’s tax-slashing chancellor Nigel Lawson to warning of tighter cash.
“This is what happens when you’re in the straitjacket of the OBR.”
An ex-Treasury adviser suggested the Chancellor’s new reticence might be “pitch-rolling” or “expectation management” to calm speculation about big giveaways, particularly after Tory Party chairman Richard Holden suggested there would be two tax cutting events this year.
The former adviser said: “The messages coming out seem so far seem quite mixed. That could be due to a few things: the numbers they’re getting from the OBR; the naturally divergent priorities between No10 and 11, which happens in any regime, or managing expectations so they can surprise on the upside – or a combination of these.
“They seem boxed in by the [internal party] politics, with the party expecting and talking up or even promising tax cuts, for example the party chairman.”
Ms Miller said there would be “no silver bullet” with which Mr Hunt will be able to boost growth but that he may focus again on national insurance as it has more “bang for your buck” than income tax cuts.
“If he wants the retail offer, a big, catchy personal tax cut – this might be a reason to prefer national insurance contributions to income tax for the same reason he did at the last [fiscal] event – because NICs is a tax on earnings and not other incomes, you get more bang for your back in terms of labour supply.
“You’re not cutting taxes on pensioners and unearned income [with national insurance].”