Chancellor Jeremy Hunt rules out pre-Election tax cuts

The prospect of pre-election tax cuts in this year’s autumn statement has been ruled out by the government due to growing concerns about the deteriorating state of public finances.

There was hope in the spring that Chancellor Jeremy Hunt would be able to implement spending cuts later this year as a result of the margin expected from buoyant tax revenues.

That possibility is now gone because of the rise in interest rates, which has dramatically pushed up the cost of servicing the national debt to £2.3 trillion.

Hunt’s room for manoeuvre, previously estimated at £6.5bn, has been more than wiped out by the £14bn increase in borrowing costs in the current financial year.

The independent Office for Budget Responsibility predicts an alarming interest bill of £91.5bn more over the next five years compared to its March forecast, due to higher government bond yields and inflation.

Despite an unexpected improvement in government lending data in the first quarter of the year, the combination of rising social bills and rising borrowing costs has severely limited the chancellor’s ability to cut spending. Persistent consumer price rises have frustrated Bank of England Governor Andrew Bailey’s attempts to bring inflation under control.

A painful series of base rate hikes from 0.1 percent to 5 percent has put a huge strain on public finances and undermined the prospect of building a war chest of tax cuts by November.

The Tories must demonstrate they can responsibly cut taxes before the general election by prudently managing loans and debt for as long as possible, or risk another Liz Truss-esque market meltdown.

Instead of tax cuts, the Chancellor is looking for ways to generate more revenue.

The government is also sticking to wage monitoring agencies’ recommendations for increases in the range of 6 percent in the face of public sector demands for double-digit wage increases.

Hunt’s determination to try to curb borrowing and limit interest payments on debt has the advantage of putting the opposition Labor party at a disadvantage. Shadow Chancellor Rachel Reeves is forcing her colleagues to backtrack on previous spending promises unless they are paid for by agreed tax reforms, such as the proposed end of the loophole for non-resident residents in the UK.

At the moment, hopes for tax cuts, particularly an end to the unjust VAT levied on foreign visitors to Britain, appear to be on hold.

Hunt has come under strong pressure from UK luxury retailers and the hospitality industry to abolish VAT for tourists. But official forecasters dispute claims that the change would pay for itself.

Current estimates from the Treasury and the Office of Budgetary Responsibility suggest that abolishing the tourist tax could cost the Treasury as much as £2bn a year and could not be afforded in the current circumstances.

There has also been a call from senior backbenchers, including former chancellor Nadhim Zahawi, for the estate tax to be abolished. The current view is that as attractive as IHT reform may be to voters, there is no fiscal room for maneuver for major tax changes. The Chancellor is well aware that the national debt is soaring. In June 2023, net debt rose to 100.8 percent of national production, up 3.5 percent from the previous year.

The costs of maintaining this mountain of loans have mushroomed. About 25 percent of the mountain of debt consists of indexed government bonds or government bonds linked to the Retail Price Index.

As a result of the Bank of England printing £450bn during the pandemic, the repayment schedule for UK debt – much of which was long-term – has been reduced. As a result, interest bills must be paid much more quickly than in the past.

There is frustration in Whitehall that the hard rate hikes imposed by the Bank have so far not put a dent in consumer behavior or inflation. Only 10 percent of households with mortgages have faced the current 6.69 percent cost to refinance a two-year loan agreement.

Many homeowners are shielded from interest rate pressures because they built up piggy banks during the pandemic. The Bank will almost certainly raise its key base rate again in early August to contain inflation, which fell to 7.9 percent in June.

Instead of early tax cuts, the Chancellor is trying to fuel growth through his pension fund reforms. He believes that at least £50bn of funds could be unlocked for investment in infrastructure and Britain’s leading innovation and technology.