The chancellor, the autumn statement… and the fantasy of tax cuts
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.
Jeremy Hunt will deliver his autumn statement on Wednesday
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”.
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Chancellor on ‘next part of economic plan’
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
Rishi Sunak suggests more tax cuts are on the way – but refuses to commit to triple lock manifesto pledge
Rishi Sunak has suggested more tax cuts are on the way because the economy has “turned a corner”.
The prime minister told reporters that while he would not comment on specifics, trimming taxes was “the direction of travel from this government”.
But it came as he refused to say if the pensions triple lock would be in the next Conservative Party manifesto – despite Downing Street insisting in September that it was “committed” to the policy.
Mr Sunak’s comments echo similar remarks by his ministers in recent weeks.
Chancellor Jeremy Hunt also said last month that the economy had “turned a corner” just before he unveiled a cut to National Insurance in the Autumn Statement.
However, four million people could also end up paying higher taxes if their wages rise after the government decided to continue the freeze on tax thresholds.
Reports suggest the Conservatives are considering additional cuts in 2024 as the party tries to woo voters and reduce Labour’s 20-point lead in opinion polls ahead of the next general election, which must take place by January 28 2025.
Cuts to stamp duty and inheritance tax are among the options reportedly being looked at by ministers.
When asked about the two policies, Mr Sunak said: “I would never comment on specific taxes. But what I will just say, though, is we have turned a corner.
“We have got inflation down, as I said we would, we have grown the economy and we are now focused on controlling spending and controlling welfare so we can cut taxes. So when we can do more, we will.”
He added: “We want to grow the economy, we want to reward people’s hard work and aspirations and cut their taxes responsibly. That is the direction of travel from this government.
“If you want controlled public spending, controlled welfare and your taxes cut, then vote Conservative.”
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Mr Sunak was unable to make similar promises about the triple lock, which ensures the state pension must rise every April by whichever is highest out of average earnings, inflation or 2.5%.
The policy has come under fire in recent months by critics who claim it has become too expensive and gives the government less financial “headroom” to deal with economic shocks.
Some senior Tories have called for it to be scrapped and Labour has refused to guarantee the triple lock will remain in place if it wins the next election.
While the government continued with the policy in its recent Autumn Statement, ensuring the state pension will rise by 8.5% in April 2024 to £221.20 a week, Mr Sunak refused to be drawn when asked directly if it would be in the next Tory manifesto.
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Analysis: Autumn Statement 2023
Speaking to journalists as he flew between the UK and Dubai for the COP28 summit, he replied: “[I’m] definitely not going to start writing the manifesto on the plane, as fun as that would be.”
Mr Sunak acknowledged there had been “some scepticism” about if policy was going to form part of the Autumn Statement, but said its inclusion had been “a signal of our commitment to look after our pensioners who have put a lot into our country”.
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NHS will remain free at point of use ‘as long as I’m alive’, new health secretary Victoria Atkins vows
The new health secretary has promised the NHS will remain free at the point of use as long as she is “alive” as the service gears up for another difficult winter.
Victoria Atkins, who replaced Steve Barclay in Rishi Sunak’s most recent reshuffle, made the commitment while discussing the “unique” pressures the NHS faces every year.
“We have 11 million inpatients a year so the scale of the NHS is unique around the world,” she told Sunday Morning with Trevor Phillips on Sky News.
“It is also unique because of the very fact that our care is free at the point of use. And that will continue for as long as I’m alive.”
Her commitment came as the NHS continues to suffer acute pressures, including a waiting list of an estimated 6.5 million people at the end of September and a high number of staff vacancies.
The difficulties facing the NHS has generated questions about its future, with the British Social Attitudes survey finding that the British public is the unhappiest it has ever been with the health service – but that it still supports it in principle.
Ms Atkins admitted there would be a “winter crisis” in the health service over the coming weeks and months as temperatures drop and people contract more illnesses.
She said the government had started preparing for the winter with an urgent and emergency care plan and that, having met its target to recruit 50,000 more nurses, it was “beginning to meet” the target of 5,000 more beds in hospital in a bid to cut delays.
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Asked about the fact that three coroners had written to her to warn that ambulance delays were already causing unnecessary deaths, Ms Atkins said she was “very concerned” but that 800 new ambulances would be brought into the service.
She also claimed that category two ambulance times – which cover urgent calls for problems including strokes, and demand a response time of 18 minutes – had already improved.
Sir Trevor read out statistics from NHS England which showed that in 2014, the total number of people who had to wait 12 hours for hospital admission after a decision had been taken to admit them was 489.
In October this year, the average number of people who had to wait over 12 hours stood at 1,440 – nearly three times as many, he said.
Asked what she would do to solve the problem, Ms Atkins said hospital discharge was key.
“What we are doing to address this is almost looking at the end rather than the beginning, because if we can move people out of the system more quickly, then the flow through the hospitals is much smoother and quicker.”
Elsewhere in the interview, Ms Atkins was asked about how the NHS would fill 121,000 vacancies if the UK looks to cut immigration, with statistics showing that in June this year 265,000 people in its workforce came from abroad.
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Ms Atkins said that while those from overseas who worked in the NHS were “incredibly important to the system”, “immigration as a whole is too high”.
Last week, figures from the Office for National Statistics showed that net migration hit a record high of 745,000 in 2022 – revised up from a previous estimate of 606,000.
Ms Atkins said the government’s long-term workforce plan will see more nurses and doctors in the UK trained and retained in the system.
“We are working across government to tackle immigration because we understand it’s of great concern, but we can do this in a way that protects the NHS,” she added.
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