Hunt may be tempted to delay tax cuts

‘The Budget has the potential to become an existential crisis for the Tories’

When Rishi Sunak was chancellor, he had a habit of under-promising in the lead-up to his Budgets, then overdelivering on the day. Of course, this was much easier to do a few years ago. The money tap was turned all the way up: cash was flowing.

Jeremy Hunt is in no such position. The tax cuts that both he and Sunak were promising at the start of the year are unlikely to be realised next week when he stands up in the Commons to deliver his spring Budget.

Independent forecasters have been downgrading how much fiscal headroom they think Hunt will be working with next week. The current consensus is around £15bn. This isn’t enough to deliver on the substantial income tax cuts that were being floated as part of the Tory pivot towards a smaller state. It’s now more likely Hunt will continue to bring down employee National Insurance, a trend that he started in his Autumn Statement last year. Hunt’s fundamental problem is one that faces all ministers presiding over bloated government finances: taxation and spending are at record levels, yet there seems to be no cash to spare.

Part of the problem is that taxpayercash is being spent on undesirable, but also unavoidable, things. The money printed and spent during the pandemic contributed to the inflation spiral, which is only now just coming under control. Interest rates had to surge to curb price hikes, so the Treasury now spends £55bn more on debt interest payments alone than was forecast in Sunak’s final Budget as chancellor, according to the Institute for Fiscal Studies.

Taxpayers get nothing new for this money – no new hospitals, no filled potholes. It simply pays for what’s already been borrowed and spent. Of course it’s not the case that there is no money. Indeed there’s plenty to go around. But with the Government dealing with the irresponsible spending habits of the recent past – what’s left over isn’t quite enough to deliver on the major tax cuts expected by workers before a general election.

What happens next week has the potential to become an existential crisis for the Tories.

The promise of Sunak’s strategy, since he first entered Downing Street, was that making difficult fiscal decisions in 2023 meant tax cuts would be possible closer to the election.

Holding back on tax cuts, letting interest rates take their pain, even going into a mild recession were all prices worth paying to get price spirals under control. Once the headline inflation rate came down, the tax burden could follow.

The Autumn Statement was supposed to mark the start of that trend, focusing on tax cuts for business. The tax cuts were substantial, but thanks to the huge stealth tax brought in by chancellor Sunak – the freeze on tax thresholds – the tax burden overall didn’t budge.

But Sunak and Hunt both insisted this was just the start: that business tax cuts would be followed with even bigger cuts, likely to be income tax, which would finally get the tax burden falling from its post-war high.

Next week’s Budget was billed as the one to watch – the moment that the election would be shaped, and perhaps the polls would start to shift. So what happens when the “election Budget” promised isn’t delivered?

It’s possible the Government will resign itself to what the public finances look like now. But it doesn’t seem probable. To accept defeat on the tax burden is to confirm that there is no serious distinction between the Tories and Labour on the economy. Once the Government gives way on this point, it will seem like nothing short of accepting defeat.

One option being pushed on the Right of the party is to simply ignore what the Office for Budget Responsibility has told the Treasury it has room to spend, and go for major tax cuts. Hunt could probably take small punts, and insist that growth might be marginally better than forecast, or that tax receipts might be ever so slightly higher, but not enough that it would meaningfully move the dial on what he can deliver.

All signs point, then, to another fiscal event before an election. So do the economic indicators. It’s highly likely that the UK is coming out of recession. Perhaps most importantly, a return to the Bank’s inflation target of 2pc – which is expected to happen in April, when Ofgem’s lower energy price cap kicks in and higher energy prices fall out of the data – will slowly but surely lead to the Bank of England starting the process of easing interest rates. This will be a game-changer for the Government. It seems there are no great options for the Chancellor next week. But the best announcement might be: don’t look at this Budget, look to the next.