Jeremy Hunt sought to blunt the impact of the highest levels of taxation since the second world war with a cut in workers’ national insurance contributions, fuelling speculation about a snap spring general election.
With the Conservatives trailing in opinion polls, the chancellor used a fresh squeeze on public spending to pay for a bigger-than-expected reduction in NICs worth £450 a year to the average employee, coupled with permanent 100% investment breaks for business.
Leading thinktanks said what Hunt called the “biggest tax cut on work since the 1980s” was based on unrealistic assumptions about the ability of already squeezed government departments to cope with a fresh dose of post-election austerity.
Chancellor’s tax cut opens door to early election – and sets a trap for LabourRead more
Hunt said his £20bn of tax cuts were possible because the economy had “turned the corner” even though the government’s own watchdog – the Office for Budget Responsibility (OBR) – said growth would be weaker and inflation higher next year than it had predicted at the time of the budget in March. Living standards will be 3.5% lower in 2024-5 than they were before the Covid-19 pandemic, it warned.
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Highlighting that the government is now on an election footing, Hunt also raised state benefits by 6.7% from April and handed pensioners a £900 a year boost by delivering the triple lock in full. In the weeks leading up to the autumn statement, the Treasury had been toying with the idea of raising welfare payments by 4.6% and excluding bonuses from the calculation of the triple lock.
Hunt also slashed NICs for the self-employed, which he said would be worth £350 a year and benefit almost 2 million people. “If we want people to get up early in the morning, if we want them to work nights, if we want an economy where people go the extra mile and work hard, then we need to recognise that their hard work benefits us all,” he said.
Alcohol duty will be frozen until 1 August 2024, meaning no increase in duty on beer, cider, wine or spirits, but duty on hand-rolling tobacco will rise by 10%, it was announced. Shares in the part state-owned NatWest bank will be offered to the public before the election.
The OBR revealed that Hunt’s tax cuts would, in part, be paid for by a deep public service squeeze up to 2027-28. Unprotected departments, which the watchdog said were “already showing signs of strain”, would face average reductions of 4.1% a year in real terms. This includes most areas other than the NHS, schools, defence and international aid.
“Delivering these spending plans while maintaining or improving public services would require significant improvements in public sector productivity,” they added.
Hunt was provided with the scope to cut taxes because higher-than-expected inflation has made the freezing of tax allowances and thresholds until later in the decade more lucrative for the Treasury.
The OBR said that Hunt’s 2p national insurance cut, fast-forwarded to January, would offset only a quarter of personal tax-raising measures announced by the government since 2021 – which are still on track to rise by almost £45bn by 2028, leaving tax as a share of national income at a postwar high of 38%.
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The Institute for Fiscal Studies thinktank said while higher inflation had pushed up tax revenue, department budgets would not automatically adjust.
Paul Johnson, its director, said: “These tax cuts have been ‘paid for’, in effect, by a bigger squeeze on the real-terms value of public service budgets and an even bigger squeeze on public investment, which is frozen in cash terms. There’s a material risk that those plans prove undeliverable and today’s tax cuts will not prove to be sustainable.”
Andrew Goodwin, of the consultancy Oxford Economics, said: “In our view, the spending assumptions don’t look credible and will cause major problems for whoever forms the next government.”
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The shadow chancellor, Rachel Reeves, said Hunt’s tax cuts would not “remotely compensate” for hikes already in place, with working people left “worse off” despite the government’s promises. “I think we can forgive taxpayers for not celebrating when they see the truth behind today’s announcements. The fact is that taxes will be higher at the next election than they were at the last,” she said.
With the Resolution Foundation thinktank estimating that by the end of the 2020s the average household will be paying £4,300 more in tax than they were in 2019, Hunt is under pressure from Conservative MPs to go further on tax cuts.
Torsten Bell, the Resolution Foundation chief executive, said: “The truth is taxes are up not down. Today’s cuts are dwarfed by tax rises already under way.
“Worse, the giveaways announced today are funded by handing whoever wins the next election implausibly large spending cuts. Tax cuts to boost business investment are welcome, but undermined by plans to cut public investment by over a third – it’s hard to think of a more anti-growth policy.”
Ranil Jayawardena, a right wing MP who runs the Conservative Growth Group, said: “Next we need to turn our attention to the squeezed middle – the police sergeants, experienced schoolteachers and junior doctors – who shouldn’t be paying 40% tax, by lifting that threshold.”
Government insiders, however, suggested the chancellor was working to a two-stage strategy with income tax cuts coming in the spring as the Tories prepare for the election.
One of Hunt’s Treasury ministers, Bim Afolami, appeared to confirm that more tax cuts were on the cards, saying that the government “hopes to return more of your hard-earned money to you” in the budget in March, if the economic conditions are right.
Former chancellor George Osborne suggested on his podcast Political Currency that Hunt was “opening the door” to a May election by recognising that “you can’t fatten the pig on market day”.
He added: “You have to make your party attractive and you need to make people feel the benefits of your policies in the many, many months in the run-up to that election.”
