Ahead of the Autumn statement on Wednesday, Prime Minister Rishi Sunak has promised to cut taxes “carefully and sustainably”. Sunak has not given details but said he is able to move onto the “next phase of the Government’s economic plan as inflation has fallen 4.6%.
Although Sunak has met his pledge of halving inflation in 2023, the rate of the Consumer Prices Index is still well above the Bank of England’s 2% target.
The autumn statement
As Chancellor Jeremy Hunt prepares to unveil his statement, he refused to rule out an income tax cut, stating that he wants to put the country on the path to lower taxes but would only do so in a responsible way. He would not be drawn on whether he would cut income tax or national insurance, but said that spending cuts may be necessary to cut taxes. “If you want to bring down personal taxes, the only way to do that sustainably is to spend public money efficiently.” The prospect of tax giveaways comes ahead of a general election expected next year and with the Government seeking a boost to turn around opinion polls which have shown consistent Labour leads.
In a speech delivered today, Sunak said he was taking “five long-term decisions” for the economy and public finances. They would focus on reducing debt, cutting tax, building sustainable energy, backing British businesses and delivering world-class education. He contrasted his approach to the public finances with that of Labour, contending that Keir Starmer and Rachel Reeves wanted to continue the “big government, big spending approach” of the pandemic, with up to £28 billion of borrowing a year for Labour’s green plans.
Tax cuts
The decision to cut taxes would mark a major shift in the Government’s strategy as it was thought that tax cuts would be involved in the spring budget in an effort to persuade voters in the run-up to a General Election.
Typically ministers use the September figure for inflation when uprating working-age benefits, which would mean a 6.7 per cent hike. But the Chancellor has not ruled out using October’s far lower figure of 4.6 per cent, saving around £3bn. Using the lower rate would affect the incomes of 9 million low-income families, according to the Resolution Foundation. New analysis by the think tank said families would lose as much as £500 a year.
A reduction in the basic income tax rate or national insurance is believed to benefit more people than slashing inheritance tax. Slashing inheritance tax – potentially by half – could be popular with some on the Tory right, but would only directly benefit a small proportion of the public. A new report by the respected Institute for Fiscal Studies (IFS) report said an inheritance tax cut would deliver an average £180,000 windfall for millionaires. IFS director Paul Johnson said cutting inheritance tax would be “a very odd statement of priorities”.
Only around 4 per cent of deaths in 2020/21 resulted in inheritance tax being paid, with exemptions allowing many couples to pass on up to £1m tax-free. Inheritance tax is charged at 40 per cent on estates of more than £325,000, with an extra £175,000 towards a main residence passed to direct descendants.
However, Conservative MP David Jones, deputy chair of the European Research Group, urged Hunt to focus on slashing inheritance tax and corporation tax. Moreover, economic experts have said that despite the chancellor benefitting from an enhanced fiscal “headroom” of £25bn – much bigger than his previously anticipated £6.5bn – it is too soon to risk big tax cuts.
Final thought
As the autumn statement looms, the prime minister has been under pressure from many in his party to reduce taxes, which currently sit at a 70-year high – ahead of the next election. A cut on income tax would also revive support among the right of the Conservative Party and can be seen as a way of eroding Labour’s poll lead by forcing Starmer to say he will reverse tax cuts.