Hunt must break free of this tax trap

With his Budget just five weeks away, the Chancellor is being assailed with advice about what he can or should do by outside bodies. The International Monetary Fund (IMF) has told Jeremy Hunt he should not cut taxes, arguing that the country needs to curb public borrowing. Any spare cash should be spent on health, education and tackling climate change, it asserts. Pierre-olivier Gourinchas, IMF chief economist, said the UK’S focus should be on “the path towards a fiscal consolidation”.

His unwelcome intervention came as the Chancellor was supposedly putting the final touches to a package that would include tax cuts. Mr Hunt rejected the IMF’S recommendations, but only up to a point. He has told colleagues that tax cuts in the spring Budget may be smaller than expected because of “major structural weaknesses” in the economy, notably poor productivity. The fiscal headroom was likely to be lower than in the Autumn Statement, when Mr Hunt reduced national insurance by two percentage points.

But the amount of “fiscal headroom” available is determined by an outside organisation, the Office for Budget Responsibility. It takes the Chancellor’s own fiscal rules as a guide and effectively decides how far he can go and still receive its imprimatur. Its influence is considerable. When the ill-starred Kwasi Kwarteng mini-budget sought to bypass OBR scrutiny, the markets reacted so badly that he and Liz Truss were forced from office. Mr Hunt is similarly trapped. The IMF and the OBR do not seem to subscribe to the notion that tax cuts can boost the economy. The IMF also appears very committed to a high-tax, big-state economic model.

The Chancellor told the Cabinet that what he now calls “smart” tax cuts can make a big difference in boosting growth, but the very term indicates that he is seeking to lower expectations of anything more dramatic. His party wants something that impresses voters in an election year.

Mindful of its vulnerability in this area, Labour is making noises about the importance of wealth creation, with Rachel Reeves, the shadow chancellor, vowing not to reintroduce a cap on bankers’ bonuses scrapped last year. “I would want to be a champion of a successful and thriving financial services industry in the UK,” she said. But Labour remains wedded to high levels of public spending, as are the Tories. Until we stop spending far more than we produce, the economy will continue to stagnate.