The chancellor, the autumn statement… and the fantasy of tax cuts

Published

10 months ago

November 19, 2023

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There will be a lot of positive talk from the chancellor when he delivers his autumn statement on Wednesday, but this will be a fiscal event full of illusory gains.

The government is on track to borrow less than previously forecast, which will give rise to a fantasy that Chancellor Jeremy Hunt has more space to slash taxes than he actually has.

It’s a fantasy because these gains on borrowing are largely the product of high inflation, which has bolstered tax receipts. The government hasn’t admitted it yet, but inflation will inevitably drive up spending too.

It means Hunt’s room for manoeuvre is actually limited if he wants to meet his target of getting debt falling as a proportion of gross domestic product (GDP).

Although interest rates, which have been higher than expected, will weigh on the public finances, the windfall from higher taxes bolstered by inflation and wage growth will more than offset this. The Office for Budget Responsibility (OBR) will likely show that the government’s headroom against that target has grown from £6.5bn to around £13bn.

Jeremy Hunt will want to claim this as a victory, while also tempering expectations for tax cuts. His message will be that the public finances are improving under this government but they are in too poor a shape to allow for any tax cuts.

This is where the political infighting begins. Many MPs within his own party want him to use that headroom to cut taxes. They are perturbed by the fact that a Conservative government has overseen growth in the tax burden to its largest in the post-war era.

Among the most egregious of these tax rises is the freezing of thresholds, a stealth tax which will see taxpayers pay £40bn a year more by 2028. It has dragged millions of public sector workers, including teachers and nurses, into the higher band of tax.

Tensions over taxation have been simmering in the party and will likely flare up again because Hunt is unlikely to make any big giveaways. The government is insistent that the priority must be to bring inflation down because any tax rises could drive inflation higher. However, with the target to halve inflation now met, MPs will be asking when the tax cuts can begin.

Both Hunt and Rishi Sunak are sensitive to this and will probably throw a bone or two. Downing Street has been looking for options that are relatively inexpensive and less likely to increase inflation.

There are a number of policies under consideration, including the scrapping of inheritance tax, or a reduction in the rate from 40% to 20% on estates above £325,000. The government could also cancel a planned increase on stamp duty. Together, these policies would cost about £5.2bn. The chancellor is also expected to cancel the planned 5p increase in fuel duty from April next year, which will cost £6bn.

So, any giveaways would quickly swallow up the headroom, at a time when government spending will inevitably have to rise. Departmental budgets are set in cash terms and high inflation means that the cost of paying prison guards and running courts has gone up. Without substantial increases, public services face real-terms pay cuts.

On current plans, unprotected departments would see their spending power cut by 16% between 2022-23 and 2027-28, which would be a similar pace of cuts to those implemented by George Osborne in the early 2010s. The Resolution Foundation, a left-leaning think tank, described this scale of the cuts as a “fiscal fiction” that is “undeliverable”.

The opposition will be keeping a hawk eye on this and will be quick to decry any signs that the country is returning to a period of austerity. It will also be quick to attack any of the government’s tax-raising plans – and there will be a number of them.

Tax thresholds will probably remain frozen into 2029, a policy that could raise another £6bn. The Treasury will also be cracking down on benefits, uprating them in line with October’s inflation rate of 4.6% instead of September’s figure of 6.7%. That could save £2bn. A tweak to the triple lock calculation for pensions could net £600m.

So, for all the large upward revisions to the numbers coming out of the OBR, it’s a fiscal event that is unlikely to inspire. There will be some tweaks around the edges and some big talk on plans to boost economic growth.

However, the government will probably want to keep its powder dry for the budget in March. Unfortunately, that may not be enough to satisfy Tory MPs, who are hungry for tax giveaways now.

Politics

African economies show high potential for digital asset adoption

Published

10 hours ago

September 22, 2024

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African economies show high potential for digital asset adoption

South Africa emerges as a leading digital asset hub, driving growth in crypto with proactive regulations and expanding platforms like VALR.

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Angela Rayner promises flagship workers’ law next month as she pledges ‘things can get better’

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10 hours ago

September 22, 2024

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Angela Rayner promises flagship workers' law next month as she pledges 'things can get better'

Angela Rayner has promised to bring Labour’s flagship workers’ rights bill to parliament next month as she told her party’s conference: “Things can get better if we make the right choices.”

The government has faced criticism in recent weeks over its pessimistic messaging around the economy, with Prime Minister Sir Keir Starmer warning October’s Budget would be “painful” in order to deal with the £22bn “black hole” he claims was left by the Conservatives.

But while his deputy said the party “can’t wish our problems away”, she said “hope won” when Labour achieved its landslide at the last election, adding: “Change has begun.”

Politics live: Rayner speaks at Labour conference

Speaking on the conference floor on the first full day of Labour’s annual gathering, Ms Rayner said: “Let me be blunt. We can’t wish our problems away. We have to face them. That’s the difference between opposition and government.

“But… things can get better if we make the right choices. Sustained economic growth is the only way to improve the lives of working people, and we’re fixing the foundations to put Britain back on the path to growth. No more talking, but doing.”

The deputy prime minister reiterated her party’s plans to improve renters’ rights, including ending no-fault evictions “for good”, as well as promising a “devolution revolution” in the north of England, and the “biggest boost to social and affordable housing in a generation”.

But some of the biggest cheers from delegates came over her long-trailed plan to increase workers’ rights across the country, with her promising to bring the Employment Rights Bill to the Commons in October.

Concerns have been raised over the legislation by some in the business community, with an Institute of Directors’ survey earlier this month citing the bill as a reason for pessimism among firms who fear the impact on their operations.

But the government has sought to play down any divide, and held several roundtables with company leaders in recent weeks to allay their fears.

Championing the bill, Ms Rayner said: “They said we couldn’t do it. Some tried to stop it in its tracks. But after years of opposition, we are on the verge of historic legislation to make work more secure, make it more family friendly, go further and faster to close the gender pay gap, ensure rights are enforced and trade unions are strengthened.

“That means repealing the Tories’ anti-worker laws and new rights for union reps too. A genuine living wage and sick pay for the lowest earners, banning exploitative zero-hour contracts and unpaid internships, ending fire and rehire. And we will bring in basic rights from day one on the job.

“This is our plan to make work pay, and it’s coming to a workplace near you.”

Concluding her speech, the deputy prime minister said: “On 4 July, the people entrusted us with the task of change and hope won. Now is our moment, not just to say, but to do.

“Labour governments of the past took on this same challenge at a time when Britain desperately needed change. They delivered a better Britain when the odds were stacked against them.

“And that is exactly what this Labour government must deliver once again. So conference, let’s get on with it.”

Politics

Angela Rayner to announce renters’ protections at opening of Labour Party conference

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12 hours ago

September 22, 2024

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Angela Rayner to announce renters' protections at opening of Labour Party conference

Angela Rayner will set out measures to protect renters from fire safety defects, damp and mould in her speech at the Labour Party conference.

The deputy prime minister, who is also the housing secretary, will commit to “building homes fit for the future” when she opens the party’s first annual gathering since winning the general election.

The package will include bringing forward a Remediation Acceleration Plan this autumn to speed up the removal of unsafe cladding on high-rise buildings.

Deadly cladding remains on more than half of all residential blocks of flats identified as at risk since the Grenfell fire in 2017.

The issue has come back into the spotlight following the conclusion of the inquiry into the tragedy, which found that “systematic dishonesty” contributed to the blaze that killed 72 people.

The announcement of the acceleration plan was thin on detail, but the government said it would go “further and faster to fix unsafe cladding and make existing homes safe”.

Other measures Ms Rayner will announce on Sunday include consulting on a new “decent homes standard” for the social and private rented sectors, and a new law to make landlords respond to complaints about disrepair within legally binding timescales.

These have already been announced as part of Labour’s Renters’ Rights Bill, which builds on long-awaited legislation that was promised by the Tories but ultimately shelved ahead of the general election.

The law regarding repairs will be named after two-year-old Awaab Ishak, who died as a direct result of exposure to mould in the social home his family rented in Rochdale, Greater Manchester.

The Conservatives first proposed Awaab’s Law to cover the social rented sector, but Labour will extend it to cover the private sector in a move they say will help tenants in 746,000 homes with reported serious hazards secure faster repairs.

Commenting ahead of her speech, Ms Rayner, who has also pledged to build 1.5 million homes over the next five years, said: “Just because Britain isn’t working at the moment, it doesn’t mean it can’t be fixed.

“We will deliver for working people and, in doing so, show that politics can change lives.

“This Labour government is taking a wave of bold action to not only build the housing our country needs and boost social and affordable housing, but to ensure all homes are decent, safe, and warm.”

The speech comes as a donations row threatens to overshadow the optimistic mood of the party’s first conference while in government for 15 years.

The prime minister has come under scrutiny over the past week for the more than £100,000 worth of gifts he has accepted, including tickets to football matches, concerts and luxury clothes.

Following days of press coverage on the issue, it emerged on Friday that Sir Keir and his most senior ministers – Ms Rayner and Chancellor Rachel Reeves – will no longer accept donations to pay for clothes.

On Saturday, Culture Secretary Lisa Nandy told Sky News that there had not been an undue influence in gifts accepted by her colleagues but “we don’t want the news and the commentary to be dominated by conversations about clothes”.

She defended the prime minister’s actions as being within the rules, saying that the taxpayer doesn’t fund these things “so MPs will always take donations, will always take gifts in kind”.

She added: “We expect our politicians to be well turned out, we expect them to be people who go out and represent us at different events and represent the country at different events and are clothed appropriately.

“But the point is that when we accept donations for that or for anything else, that we declare them and we’re open and transparent about them.”