Jeremy Hunt warned the cabinet of the possibility that the tax cuts included in the spring budget could be less than expected due to “major structural weakness” in the economy.
On March 6, the chancellor or prime minister will consider reducing income tax, or the national insurance rate. They are hoping to boost the Conservatives’ election fortunes.
The chancellor said at a cabinet session that there would be less room for tax reductions than in his autumn statement when he cut national insurance by 2 percentage points.
He said that the relatively low productivity levels in Britain were “our main structural weakness”, and he cited official figures which showed that France, Germany, and the US were more productive.
The International Monetary Fund (IMF) warned against tax cuts before the budget on Tuesday, as it downgraded Britain’s growth prospects. The IMF said that the UK should reduce borrowing and prioritize public spending on areas like health, education and climate change.
Hunt rejected the IMF recommendations, but he said Britain would continue to push forward with “smart tax reductions” that encourage work and lift up the economy. It is too soon to tell if further tax cuts will be feasible in the budget. However, we still believe that smart tax cuts can have a significant impact on boosting economic growth.
Cabinet ministers warned Hunt to “go big” in his spring budget with tax cuts if the Tories hope to close the gap with Labour in the polls.
The IMF figures suggest that the UK will be the second-worst-performing economy in the G7 after Germany
Treasury estimates that based on current projections, there will be £14 Billion in “fiscal room” — money available for tax reductions — by the budget of March. A portion of this money will be kept in reserve to act as a buffer for any changes in the economic situation.
Hunt said at the cabinet meeting that the government had £35bn of fiscal headroom when it made its autumn statement, which allowed him to implement £22bn of tax cuts. He said that there was not as much fiscal headroom as in the autumn to implement tax cuts.
The projected headroom would be consumed by the two main tax reduction options — income tax and national insurance. A further two-percentage-point reduction in national insurance costs £9 billion per year. A 2p reduction in income tax is more expensive at £13.7 billion per year because both workers and pensioners would benefit. This week, the Office for Budget Responsibility is due to release official forecasts.
Official projections are subject to change. Hunt and Treasury were briefed by the Treasury that there was not much money available prior to the autumn statement, only for the growth forecasts improve dramatically giving him room for tax reductions.
A cabinet minister stated: “It is difficult to tell if it is expectation management or not at this point.” Fiscally, he is constrained.
Sunak and Hunt suggested that the government, if needed, could reduce public spending further to make room for tax reductions.
Tax cuts that are less than anticipated could have a significant political impact. Sunak faces pressure from the right as he tries to stave off a plot against him. Tory strategists worry that the fall’s cut in national insurance has not yet had an impact on polls. They think that voters viewed it as a pre-election “bribe”.
Now, the government is trying to portray tax cuts as a key component of economic growth. YouGov found that 62% of voters think the government should spend more on public services.
IMF stated on Tuesday that ministers will need to increase taxes in order to cover the demands of public service spending without borrowing. The IMF said that the government must “enhance carbon and property taxes, close loopholes and improve income and wealth taxation.” In this context, [IMF] staff recommend against further tax reductions.
IMF projections also suggest that Britain’s economy is likely to be the second worst performing G7 after Germany with a growth of 0.6% this year. This projection remains unchanged from the forecasts made last autumn. The growth rate for next year has been reduced by 0.4 percentage point to 1.6 percent.
IMF stated that the downgrade was due to the slower pace of catch-up after statistical revisions revealed that Britain had performed better than expected in the pandemic. The fund stated that growth will start to pick up by the end the year, as “disinflation permits an easing of financial conditions and allows real incomes recover”,