Can the government cut taxes again before the election?

In the Autumn Statement, Jeremy Hunt announced 110 measures – yet widely trailed cuts to inheritance tax, stamp duty and income tax were not among them. Has the government held something back for a pre-election giveaway?

How much is there? 

The government's financial position is better than the Office for Budget Responsibility (OBR) watchdog expected in March. The chancellor has met his key fiscal target that debt should be falling as a proportion of gross domestic product (GDP) in five years’ time – and had some ‘headroom’ to spare. According to the Office for Budget Responsibility (OBR’s) latest forecasts, the rule has been met by a margin of £13bn – double the ‘headroom’ it expected at the time of the Spring Budget. 

But Hunt’s £13bn headroom is considerably lower than the almost £30bn that chancellors have typically enjoyed against their fiscal rules since 2010, meaning he has less to work with as the election approaches. Matters are complicated further by the fact ‘headroom’ is such a slippery concept. It describes the difference between where the chancellor wants the economy to be and where forecasters think it will end up – and as a result, it is far less concrete than it sounds. 

The impact of departmental spending is already emerging as a concern. Hunt has decided to leave it broadly unchanged, which equates to a huge real-terms cut at a time of high inflation. The OBR calculates that there has been a £19.1bn erosion compared with its March forecasts, and this has driven a huge reduction in the government’s projected borrowing figures. Yet governments tend to top up budgets as spending reviews approach. The OBR notes rather sceptically that “the outlook for department spending is therefore a significant and growing risk to our forecast”. 

The latest forecasts

Although the government hailed its progress in halving inflation this year, the OBR increased its forecasts. The watchdog now expects an inflation rate of 2.8 per cent in 2024, up from 0.9 per cent in its March projections. The OBR thinks that the latest policy measures will actually help to reduce inflation, as changes to alcohol and tobacco duty feed through. Yet the government will be acutely aware that significant giveaways would boost demand next year and come against a very volatile inflation backdrop. 

Sticky inflation isn't the only problem facing the economy. The OBR also downgraded its growth forecasts, and sees the economy expanding by 0.7 per cent in 2024, instead of the 1.8 per cent it forecast in March. This is bad news for both the tax take and the government’s fiscal position – it is a lot harder to shrink debt as a proportion of GDP if GDP isn’t growing. 

Plans for 2024 

The measures announced in the Autumn Statement won’t do much to dampen calls for further tax cuts. The OBR estimates that the new policies have reduced the UK tax burden by only 0.5 per cent of GDP, leaving it firmly on track to reach a post-war high, as the chart shows.

Cuts to National Insurance will also do little to offset the impact of fiscal drag. Inflation has increased earnings, but tax thresholds have not increased in tandem, dragging many people into higher bands. The cuts announced in the Autumn Statement represent less than a quarter of the tax rises already in train thanks to the impact of frozen thresholds. 

The chancellor’s fragile headroom could also easily disappear. Paul Johnson, director of the IFS think tank said that Hunt’s “so-called ‘headroom’ against a rather loose fiscal target is miniscule and the OBR could easily take it away again in the Spring Budget with some very small changes to forecasts”. 

This would leave Hunt in the uncomfortable position of having to decide whether to accommodate higher borrowing or announce austere tax and spending policies, all as the election approaches. Whatever the economic backdrop, there will be pressure to pull – or drag – a rabbit out of the hat next Spring.