July 14, 2024

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Jeremy Hunt’s ‘dubious’ financial planning lacks credibility, says IFS | Budget 2024 (spring)

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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.”

A Treasury spokesperson said:Our responsible action with the public finances meant we could cut taxes for working people and businesses in the autumn statement. We will not comment on speculation over whether further reductions in tax will be affordable in the budget.

“We are on track to meet our fiscal rules, and total departmental spending will be £85bn higher after inflation by 2028-29 than at the start of this parliament, including record funding for the NHS.”


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