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Chancellor Jeremy Hunt has raised the possibility of further tax cuts before the next general election as he counts on recent reductions to national insurance and the prospect of lower interest rates to improve the Conservative party’s fortunes.
In an interview with the Financial Times, Hunt said the government would like to cut taxes in an autumn fiscal event “if we can” — while insisting it was too soon to know if it will happen and stressing the need to act in a fiscally responsible way.
Hunt also highlighted how market forecasts point to Bank of England rate reductions in the summer or autumn as inflation subsides, saying this means people will feel the economy has “turned a corner later this year”.
“As we move through the year towards the autumn, some of the changes in economic policy, including lower taxes, will be felt in people’s pockets — and that’s clearly something that is significant for us,” he said.
With an election expected in the second half of this year, the Conservatives are currently trailing Labour by about 20 percentage points in surveys, according to the FT poll tracker.
Hunt was speaking at the start of a trip to the US in which he will promote the idea that the UK is shrugging off a period of high inflation and stagnant growth, and that the public will start to feel benefits from an expanding economy.
He is due to meet counterparts in Washington as the IMF and World Bank hold their spring meetings and policymakers weigh the prospects of a modest global recovery this year.
However Hunt’s narrative suffered a blow on Tuesday after the IMF forecast in its latest World Economic Outlook that UK gross domestic product would grow by just 0.5 per cent this year — 0.1 point slower than the organisation’s January prediction and beneath the tepid pace predicted by the UK fiscal watchdog.
The IMF urged advanced economies to do more to rein in public borrowing, calling on them to build up their buffers against future economic downturns and bring debt under control.
That came after the IMF in January warned the UK against further tax cuts, urging it instead to curb borrowing and prioritise spending in areas such as health and education.
Prime Minister Rishi Sunak’s government nevertheless went on to reduce national insurance in March, on top of cuts already made in November and a business taxation overhaul.
Hunt said he was not in the business of making tax cuts that made the country’s fiscal position worse, insisting they were designed to increase growth.
“Every tax cut I’ve done has been on the basis of not increasing borrowing and not adding to pressure on funding for public services, and that will continue,” he said.
Asked if further tax reductions were possible, Hunt argued that one of the “big divides” in UK politics was over taxation.
He claimed Labour was happy with the status quo on taxes, while the Conservatives “look around the world and we say that countries that are growing faster tend to have lower tax burdens and we want to bring the tax burden down”.
“We’ll do so in a way that is responsible,” said Hunt, adding it was “too early” to say if an autumn fiscal event would have sufficient budgetary headroom for fiscally responsible tax reductions, and that any cuts would only be made if they did not damage public services.
“It’s something we’d like to do if we can. But it’s not something that we can possibly know whether it will be possible at this stage,” said Hunt. “Responsible management of the economy” would open the door to further tax cuts, he added.
While the Conservatives are eager to campaign on a platform of tax reductions, the UK tax burden will be on an upward trajectory in the coming years, according to the Office for Budget Responsibility. It is heading to a postwar high late this decade because of measures taken earlier in the parliament, including freezes to personal tax thresholds.
Tax as a share of GDP is predicted to hit 37.1 per cent in 2028-29, which would be 4 points higher than before the pandemic, driven by personal tax measures and an increase in corporation tax.
Hunt spoke amid a flurry of concern among investors over how soon the US Federal Reserve will be able to reduce interest rates given signs of sticky inflation.
Asked about Bank of England policy, Hunt said UK expectations of when the Monetary Policy Committee would be able to reduce rates had been coming forward for several months.
Market forecasts currently pointed to BoE rate cuts in midsummer or early autumn, he said.
“I would say that, you know, this is a year where people are going to begin to feel that the British economy has really turned the corner — particularly towards the end of the year,” Hunt added.