Jeremy Hunt has been warned against using next week’s autumn statement to announce pre-election tax cuts for the wealthy while overseeing a multibillion-pound stealth raid on the incomes of 36 million workers.
With the Conservatives trailing in opinion polls, the chancellor is considering deep cuts to inheritance tax for his set-piece speech to the Commons on Wednesday after receiving upbeat figures for the public finances from official forecasters.
Cutting inheritance tax – which is paid by fewer than 4% of all estates, affecting largely the richest in society – would, however, come with the government on track to raise a “gargantuan” £40bn from freezing income tax thresholds, according to analysis by the Resolution Foundation thinktank.
Hunt is also weighing up cuts to benefits, drawing an angry response from union leaders and charities who warned the chancellor risked ignoring the pressures facing millions of households amid the cost of living crisis.
Adam Corlett, the principal economist at the Resolution Foundation, said the government’s six-year freeze in income tax thresholds had “turned from an £8bn ‘stealth’ tax to a gargantuan £40bn tax rise” because of higher inflation.
“Any pre-election tax cuts – such as cutting inheritance tax for a small number of wealthy estates – would effectively be funded by higher taxes on the incomes of 36 million people,” he said.
The chancellor is expected to have been handed improved forecasts for the public finances from the Office for Budget Responsibility (OBR), the Treasury’s economics forecaster, as soaring tax receipts put government borrowing on track to come in about £20bn lower than expected for the current financial year.
Hunt signalled tax cuts could be on the way, telling the Telegraph that the economy had “turned a corner”, adding: “The big message on tax cuts is there is a path to reducing the tax burden and a Conservative government will take that path.”
Asked about welfare cuts during a visit to a factory, he told the BBC: “Nearly a million vacancies across the economy, so we do need to reform our welfare system.”
In spring the OBR said Hunt had £6.5bn of “fiscal headroom” within a self-imposed target to have debt falling as a proportion of gross domestic product in five years’ time. City economists expect Hunt’s headroom to have increased to about £12bn.
With less than a week before the autumn statement the chancellor received tacit backing for an inheritance tax cut from Boris Johnson, who in his Daily Mail column said a cut was “now overdue because of the deep changes that have taken place in society”.
“We baby boomers had the full-fat pensions; we had the free university; we had the cheap housing. Those benefits allowed us to accumulate phenomenal wealth, as a generation, and in the name of inter-generational fairness it is right that more of that wealth should now be passed on to our descendants,” Johnson said.
However, Ken Clarke, the former Conservative chancellor, told Times Radio that he did not think Hunt has any “headroom for tax cuts” and that he would risk a severe public backlash if working people and those on benefits had to pay for it.
“Choosing inheritance tax at the present time might appeal to the Conservative right, but it leaves them open to the most appalling criticisms when inflation and the state of affairs is making poorer people in this country very vulnerable indeed.”
Paul Nowak, the general secretary of the TUC, said any improvement in the government finances should be directed to tackling severe problems facing millions of households instead of helping the very wealthy.
“Only a tiny proportion of estates pay inheritance tax in the UK. Raiding the public purse to line the pockets of the rich is the last thing the country needs,” he said.
Hunt had been expected to hold back any tax cuts until next year as he and Rishi Sunak focus on reducing inflation. But after the UK’s annual inflation rate fell further than expected in October, and with Tory MPs clamouring for pre-election giveaways, sources said the chancellor was open to doing it sooner.
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City investors warned on Friday that cutting taxes while the UK public finances remained in a precarious position could risk a rerun of the financial market meltdown triggered after Liz Truss’s disastrous mini-budget a year ago. Analysts said that tax giveaways could also stoke inflation, risking higher interest rates from the Bank of England for longer than anticipated.
“It will be interesting to see how the gilt market reacts and having witnessed a bond market tantrum last year,” said Mark Dowding, the chief investment officer at RBC BlueBay Asset Management.
“We would not rule out a similar occurrence at some point in the future, if markets react with scepticism with respect to the government’s fiscal plans.”
Before the autumn statement, the chancellor was on Friday preparing a multibillion-pound funding package for advanced manufacturing to help kickstart economic growth from the brink of recession.
Under pressure from bosses to provide greater clarity on the financial support available for industry, Hunt announced that next week’s tax and spending plans would include £4.5bn over five years for cutting-edge manufacturing.
Available from 2025 – after the general election – almost half is earmarked for the country’s car industry, while almost £1bn will be allocated to the aerospace sector to support the manufacturing, supply chain, and development of zero emission vehicles, and investment in energy efficient and zero-carbon aircraft.
Forming the backbone of a new “advanced manufacturing plan” to be unveiled by Hunt next week, the funding will also commit £960m for a “Green Industries Growth Accelerator” to support clean energy manufacturing, and £520m for life sciences manufacturing.
However, the chancellor is also under pressure to come up with a plan for helping the most vulnerable with energy bills to replace the measures due to end next spring.
Some in Whitehall had been expecting a consultation on a social tariff for energy – promised a year ago – to be published alongside the autumn statement, but that now looks likely to be pushed into the long grass again.
Earlier this autumn, a coalition of 140 organisations and MPs called on the government to bring in a social tariff to help with energy bills this winter. Despite falling inflation, bills remain high and charities say many are facing a choice between heating and eating, with the government yet to announce any replacement for the £400 of help with energy bills given last year.
