An economic think tank has criticized Jeremy Hunt’s financial strategy, labeling it as “dubious” and “lacking credibility.”
The Institute for Fiscal Studies (IFS) suggested that if Hunt intends to implement tax cuts, he must clarify how he intends to fund them before the chancellor announces them in the upcoming budget.
According to the IFS, Hunt would need to secure £35 billion in cuts from already strained public services if he plans to use a Whitehall spending freeze to finance pre-election giveaways.
While this move could bolster the chancellor’s budget for tax cuts, it would come at a significant cost, potentially increasing the available funds from an anticipated £15 billion to around £50 billion over the next five years.
The IFS emphasized the necessity for concrete plans rather than vague promises to reduce spending.
It argued that given the probable challenges and hardships associated with further reductions, clear strategies for achieving savings are essential.
Its report said: “The economic case for tax cuts is weak. The public finances remain in a poor position.”
In his autumn statement last November, Jeremy Hunt pledged to raise Whitehall spending by approximately 1% above inflation.
However, there is mounting pressure from Conservative backbenchers to uplift voter morale on March 6th by implementing tax cuts and initiatives aimed at stimulating economic growth.
Damian Green, the chair of the One Nation caucus of Tory MPs, stated that the best way to grow the economy was by “cutting taxes and giving people the opportunity to buy their own homes”.
Speculation is rife that Jeremy Hunt may opt for a 1p (percentage point) reduction in the basic rate of income tax or introduce further cuts to national insurance contributions, building upon measures outlined in the autumn statement.
However, with existing commitments to support childcare subsidies and safeguard funding for vital sectors like the NHS, international aid, education, and defense, any resulting austerity measures are likely to disproportionately affect various unprotected Whitehall ministries.
According to the IFS, departments such as the Home Office, justice, transport, and higher education could bear the brunt of these cuts.
Reports suggest that Hunt is contemplating scaling back the planned increase in Whitehall spending from 1% above inflation to either 0.75% or even 0.5%.
Nonetheless, the IFS warns that freezing spending in real terms could emerge as the preferred course of action, potentially impacting services just as population growth drives up demand.
According to the think tank, “This would see unprotected day-to-day spending falling by 6.7% a year, and per capita spending on unprotected public services falling by 7.4% a year.”
Paul Johnson, the director of the IFS, emphasized the need for Chancellor Hunt to clarify how austerity measures would impact council services that are already struggling.
“We also have huge backlogs in the justice system, universities that are genuinely struggling after 10 years of frozen budgets, and a prison system that is full,” he added.
Hunt informed parliament of his intention to reduce the UK’s debt-to-GDP ratio in the final year of a five-year projection by the Office for Budget Responsibility (OBR).
In tandem with the budget announcement, the OBR will forecast anticipated tax revenues and government expenditures spanning from the financial years 2024-25 to 2028-29.
“The savings earmarked so far are already very challenging and further savings appear unrealistic. Talk of tax cuts inevitably triggers memories of the 2022 mini budget crisis, where UK government borrowing costs rose precipitously following a package of unfunded measures designed to boost growth.”
James Smith, an economist at the bank ING
Uncertainty Looms Amidst Tax And Spending Debate
While Smith expressed skepticism about the likelihood of a repeat of the Liz Truss-era fluctuations, the uncertainty surrounding Jeremy Hunt’s approach to balancing the government’s books is resulting in the UK paying higher interest rates on its debt than deemed necessary.
The Institute for Fiscal Studies (IFS) proposes that this year’s budget deficit could be approximately £11 billion smaller than initially forecasted in November.
Nevertheless, it is still expected to be considerably higher than the projection made in March 2022.
The IFS pointed out that the Office for National Statistics (ONS) anticipates faster population growth, which could potentially boost revenues.
However, this growth also means that Treasury plans would only allow for a modest 0.2% per-person spending increase annually post-election.
Under successive Conservative administrations, taxes have seen significant hikes, marking the most substantial tax-raising period in modern history.
A report from the Resolution Foundation think tank suggests that despite Jeremy Hunt’s £20 billion worth of tax cuts in his autumn statement, British households are on track to be worse off by the end of this parliamentary term.
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