Jeremy Hunt’s ‘dubious’ financial planning lacks credibility, says IFS

Chancellor should resist temptation to announce unfunded tax cuts in March budget, advises leading thinktank



Jeremy Hunt’s financial planning is “dubious” and “lacks credibility” and the chancellor should not announce tax cuts in next week’s budget if he cannot lay out how he will fund them, an economic thinktank has said.

The Institute for Fiscal Studies (IFS) calculates that Hunt would need to find £35bn of cuts from already threadbare public services if he plans to use a Whitehall spending freeze to pay for pre-election giveaways.

A fresh round of austerity in unprotected departments would boost the chancellor’s war chest for tax cuts, the independent tax and spending watchdog said, but an increase from an expected £15bn of headroom to about £50bn over the next five years would come at a high cost.

The IFS called for vague pledges to reduce spending to be replaced with concrete plans on where savings could be achieved, given the likely hardship and difficulty of achieving further reductions. 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, Hunt committed to an increase in Whitehall spending of about 1% above inflation, but pressure is growing from Tory backbenchers to lift voters’ spirits on 6 March with a round of tax cuts and measures to boost growth.

On Monday, Damian Green, the chair of the One Nation caucus of Tory MPs, said the best way to grow the economy was by “cutting taxes and giving people the opportunity to buy their own homes”. There is speculation Hunt may cut 1p off the basic rate of income tax or introduce a further cut to national insurance contributions, on top of the one announced in the autumn statement.

Existing promises to boost the subsidy for childcare and protect spending on the NHS, international aid, schools and defence mean the brunt of any resulting austerity would fall on several unprotected Whitehall ministries, the IFS said, including the Home Office and the departments for justice, transport and higher education.

Hunt is understood to be considering a reduction in the overall increase in Whitehall spending, bringing it down from 1% above inflation to 0.75% or even 0.5%.

However, the IFS said it was possible a freeze in real terms could become the preferred option, which would hit services at a time when a rise in the population is increasing demand.

“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,” the thinktank said.

The director of the IFS, Paul Johnson, said Hunt would need to explain how council services that are already on their knees could survive further austerity. “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 has told parliament he will bring down the UK’s debt-to-GDP ratio in the last year of a five-year forecast by the Office for Budget Responsibility (OBR).

To coincide with the budget, the OBR will predict the likely tax receipts and spending by the government for the period between the financial years of 2024-25 and 2028-29.

James Smith, an economist at the bank ING, said: “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.”

While Smith said a repeat of the Liz Truss-era gyrations was unlikely, the uncertainty surrounding how Hunt would balance the government’s books meant the UK was paying higher interest rates on its debt than was necessary.

The IFS suggested that this year’s budget deficit may be about £11bn smaller than it was forecast to be in November, but still much higher than it was forecast to be in March 2022.

The thinktank said the faster population growth projected by the Office for National Statistics (ONS) could boost revenues but also meant Treasury plans would see per-person spending rise by just 0.2% a year after the election.

Taxes have increased steeply under successive Conservative administrations, bringing about the biggest tax-raising parliament in modern history. A report by the Resolution Foundation thinktank found that British households were on course to be worse off at the end of this parliamentary term, despite Hunt’s £20bn of tax cuts in his autumn statement.

Martin Mikloš, an economist at the IFS and one of the report’s authors, said: “In November’s autumn statement, the chancellor ignored the impacts of higher inflation on public service budgets and instead used additional tax revenues to fund eye-catching tax cuts. At next week’s budget, he might be tempted to try a similar trick, this time banking the higher revenues that come from a larger population while ignoring the additional pressures that a larger population will place on the NHS, local government and other services.

“He might even be tempted to cut back provisional spending plans for the next parliament further to create additional space for tax cuts. The chancellor should resist this temptation. Until the government is willing to provide more detail on its spending plans in a spending review, it should refrain from providing detail on tax cuts.”

Hunt is out of his sphere of ability, despite having some good advisers. We need someone who really understands finance and economics to be chancellor, not a poster boy!

The uncomfortable truth is that whoever wins the election is going to be forced to slash public spending and/or hike taxes on a scale never seen before.

Agreed

Pensioners lose out

Separate analysis from the Resolution Foundation, a think tank which focuses on low and middle earners, said that Wednesday's Budget would mean a net tax cut of £9bn is taking effect this year.

However, that was dwarfed by an estimated £27bn of tax rises that came into effect last year - and a further £19bn coming in after the election.

The foundation said that while more than three-quarters of the personal tax cuts announced in the Budget go to the richest half of households, there is a different picture when all the tax and benefit policies announced in this parliament - starting in 2019 - are analysed.

"Middle earners have come out on top, while taxpayers earning below £26,000 or over £60,000 will lose out. The biggest group of losers are pensioners, who face an £8bn collective hit," said Torsten Bell, chief executive of the Resolution Foundation.

He added that policy changes seen in the current parliament "reinforces the sense that the government has reversed course from the approach that dominated during the 2010s".

"Back then, support was focused on pensioners and takeaways on poorer, younger households. This time it is those aged over 65 and on the highest incomes who are set to lose most."

The Tories are toast come the GE!

Hunt’s NI pledge ‘not worth the paper it’s written on’, says IFS



Jeremy Hunt’s promise to scrap National Insurance is “not worth the paper it is written on,” the head of the Institute for Fiscal Studies (IFS) has said.

Paul Johnson said that abolishing such a major tax would only be plausible if other taxes increased or spending was cut.

The Chancellor raised the possibility of abolishing the levy on workers’ pay in Wednesday’s Budget, saying that charging employees both National Insurance and income tax is not fair.

“The result is a complicated system that penalises work instead of encouraging it,” Mr Hunt said, as he cut employees’ NI by another 2p to 8pc. “Our long-term ambition is to end this unfairness.”

However, Mr Johnson said National Insurance was simply too big a cash generator for the Government to forego. The payroll tax raises between £50bn and £60bn per year.

“Talk of abolishing National Insurance does not look realistic,” the IFS head said, adding that such a pledge is “not worth the paper it is written on unless accompanied by some sense of how it will be afforded.”

The challenge of abolishing National Insurance is not the only difficulty facing the Government. Analysis of the Budget by the IFS and others identified significant issues on debt, child benefits defence spending and more.

Mr Johnson said a toxic combination of high debt service costs and low growth means lowering debt in the next parliament could “prove to be the most difficult [task] of any in 80 years for a chancellor”.

He warned that Mr Hunt or Rachel Reeves, the shadow Chancellor, would face tough choices.

“The combination of elevated debt, low nominal growth and high interest rates means that we need to be running much tighter fiscal policy than usual if we want to get the debt down,” Mr Johnson said.

“Just to stop debt rising, we need to run a substantial primary surplus – that is, to raise more in tax and other revenues than we spend on everything other than debt interest. That’s something we haven’t done as a country since 2001.

“Even stabilising debt as a fraction of national income is likely to mean some eye-wateringly tough choices – and we are talking tens of billions of pounds worth of tough choices – on tax and spending.”

Scrapping National Insurance contributions is the first step towards making all benefits - including the state pension - means-tested.

We've already moved a long way towards that goal since Pension Credit - which often pays much more than than the state pension - is not dependent on National Insurance contributions. Likewise some other so-called 'income related' benefits.

Gordon Brown also suggested it when he was Labour chancellor but was quickly slapped-down by Tony Blair. That didn't stop him from freezing industrial disability benefit such that recipients were eventually no better-off than if they had never paid a National Insurance stamp in their lives.

The uncomfortable truth is that whoever wins the election is going to be forced to slash public spending and/or hike taxes on a scale never seen before.

Exactly as predicted:

Rachel Reeves planning to raise taxes and cut spending in October budget



Rachel Reeves is planning to raise taxes, cut spending and get tough on benefits in October’s budget amid Treasury alarm that the pickup in the economy has failed to improve the poor state of the public finances.

With the latest official set of borrowing figures out on Wednesday, the chancellor is insisting she will still have a substantial black hole to fill despite stronger than expected growth in the first half of 2024.

Reeves is concerned at official figures showing that borrowing was already running more than £3bn higher in the first three months of the financial year from April to June than forecast by the independent Office for Budget Responsibility (OBR) at the time of Jeremy Hunt’s March budget.

She announced last month that she was scrapping winter fuel payments for most pensioners, shelving plans for social care reform and axing road, rail and hospital investment as the first stage of a plan to reduce borrowing.

Now the Treasury has made it clear that further hard choices would need to be made when Reeves delivers the first Labour budget since 2010 on 30 October.

A source said: “We don’t accept the positive economic inheritance line, given the decade that went before – but regardless, nothing in the recent data can offset the scale of the black hole in the public finances we’re looking at.”

New chancellors traditionally seek to get bad news out of the way in the first budget after an election – a time when they can seek to blame their predecessors for any unpopular decisions they make.

Reeves will receive the OBR’s initial assessment of the state of the economy early next month, but she believes there is nothing to suggest the government’s underlying financial position is getting any better.

The International Monetary Fund has said the UK would need a one percentage point boost to its growth rate to relieve the pressures on the public finances caused by an ageing population and the transition to a zero-carbon economy.

Among the changes Reeves is believed to be considering are:

• Raising more money from inheritance tax and capital gains tax.
  
• Sticking to plans for a 1% increase in public spending even though it would involve cuts for some Whitehall departments.
  
• Rejecting pressure to scrap the two-child benefit cap.
  
• Changing the way debt is measured to exclude the Bank of England.

Rachel Reeves has already run out of cash



It was easy to mock it as a piece of political grandstanding. On taking office, the Chancellor Rachel Reeves almost immediately discovered a ‘black hole’ in the public finances, and started warning of tax rises in the autumn. To many of her opponents, it looked like pure opportunism. And yet, now it turns out that she was right. The latest data on public finances show that the British government really is running out of cash. There is just one snag. Everything Reeves’s colleagues are doing will make that even worse, and her threatened tax rises won’t raise anything close to enough money to make the numbers add up.

The public sector borrowing figures published by the Office for National Statistics today made for dire reading. The government borrowed £3.1 billion during July, the highest figure for that month since 2021, during the pandemic, and the fourth highest July figure since records began. That was far worse than the £0.1 billion forecast by the Office for Budget Responsibility, or the £1.5 billion forecast by a poll of City economists. The reason? The government spent more money than was expected, and welfare payments were higher than forecast, and while tax revenues also rose it was nothing like enough to cover all the outflows.

That can’t really be blamed on Reeves. She only took office following the election on 4 July. Here’s the problem, however. Everything the new government has done since it took office will push the spending figure even higher. The pay deal for junior doctors may cost as much as £2 billion. The extra money for train drivers could cost £800 million. GB Energy will get £8.5 billion of public funding, and the ‘National Wealth Fund’ will get £7.3 billion. Meanwhile the one significant saving so far, axing the winter fuel allowance for pensioners unless they receive benefits, may end up costing the government even more money, as many more put in a claim. Add it all up, and one point is already clear. The money has already run out, and very soon, at least if it is to retain any shred of credibility, the OBR is going to have to make that painfully clear.

It will, of course, be easy to make the case for tax rises in the autumn. The freeze on thresholds will remain in place, and capital gains tax will inevitably have to rise, as well as extra levies on landlords and the self-employed. If none of that works, and all the evidence tells us that increases in CGT only depress revenue because no one sells any assets anymore, then Reeves will have to confront a harsh truth. The state has run out of cash – and the cuts will have to start.