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Britain’s chancellor is in a bind. Jeremy Hunt is under pressure to unveil a spring Budget on Wednesday that can help the Conservative government cut the Labour party’s large lead in the polls, with an election months away. But, given the rocky state of the public finances, it would not be prudent to make the cuts to personal taxes that his party are pressing for. After his party’s 14 years in power, he will also be aware that tax cuts could have less impact on winning over voters than some Conservatives MPs think.
What should he do? For starters, as much as possible, he should preserve the limited fiscal “headroom” that the Office for Budget Responsibility will probably give him. Hunt is expected to have around £10-15bn of space against his rule to have debt falling as a share of gross domestic product in five years’ time. But that tight margin is already based on uncertain forecasts for economic growth, interest rates and inflation. It also relies on an unrealistic post-election squeeze to cash-strapped public services, and an increase to fuel duty that is routinely cancelled.
This ought to be a restrained budget. The UK’s debt ratio is currently set to reach around 93 per cent in 2028/29, and debt interest payments remain elevated. Plumping for personal tax cuts — however likely this now seems to be — would not be wise. The chancellor should also note that his 2 percentage point cut to national insurance contributions in November has done little to boost his party’s popularity. Years of frozen tax thresholds have squeezed household incomes. Additional snips to NI or income tax will do little to change that reality, besides being costly.
Hunt may look for revenue raisers to make room for tax cuts. The chancellor could curtail tax privileges for so-called non-doms — which are ripe for reform — but this would raise only a couple of billion. Slashing public spending plans further should, however, not be an option. Britain’s courts, prisons, and local government are already stretched. Surveys suggest voters would prioritise spending on public services over personal tax cuts anyway. Instead, the chancellor should focus any firepower he decides to use on productivity-enhancing measures, which can also boost long-term tax revenues.
First, he should begin fixing unnecessary complications and cliff-edges in the tax system. While bigger tax reforms are necessary, small adjustments at this Budget are still worthwhile.
For instance, the high income child benefit charge — the tapered removal of child benefit if either parent earns £50,000 or more annually — puts an enormous strain on people on middle incomes, and acts as a disincentive to work. Another is the £85,000 turnover threshold above which small firms charge VAT. Thousands of enterprises are curbing their growth to avoid the tax. The chancellor could also consider easing or scrapping the stamp duty reserve tax, a 0.5 per cent duty on share purchases, which adds friction to Britain’s flagging London Stock Exchange.
Second, the chancellor could build on efforts to boost business investment, following his welcome decision to make the full-expensing tax regime permanent in November. The CBI, a business lobby, suggests the Treasury could strengthen the UK’s research and development tax credits by bringing related capital expenditure into their scope. The measure could encourage more innovative firms to invest in testing facilities and labs in Britain.
Prime Minister Rishi Sunak may try to squeeze in another fiscal event before the election, to push for further headline-grabbing measures. Either way, the burden of any cuts to personal taxes and underfunded public services will fall on the next government. The temptation may be to scupper the finances for any incoming Labour administration. For the sake of the country — not to mention Hunt and his party — the chancellor should deliver a Budget that he himself would be happy to build upon in a year’s time.
