Hunt warned his tax raid risks wrecking green shoots of recovery

Jeremy Hunt risks choking off a potential economic recovery with his plans for a tax raid following a surprise rise in consumer confidence, business leaders and economists have warned.

Experts said that the Chancellor's looming increase in corporation tax will hold back growth, just as a closely-watched survey by the data company GfK found that confidence had unexpectedly bounced back to its highest level since April last year.

Jagjit Chadha, director of the National Institute of Economic and Social Research, said the tax rise will damage growth both in the short and the long term. 

He said: “It will act as an ongoing drag on the economy.

“Business investment is much lower than it should be and an increase in corporation tax is not going to help it recover.”

Mr Hunt is increasing the rate of corporation tax from 19pc to 25pc in April – a jump projected to raise £16bn per year for the Treasury.

Martin Beck of EY Item Club, a forecasting group that uses the same economic model as the Treasury, said the rise would damage the economy at a time when the outlook had improved significantly following falls in energy prices.

He said: “Just as things are looking better, they're going to raise corporation tax and get rid of the super deduction [a tax break for businesses that invest]. Public finances have improved, so is it really necessary?” 

While the raid is aimed at businesses rather than consumers, Mr Beck said they would still feel the impact at a time of fragile recovery. 

He said: “Corporation taxes are paid by some combination of workers through lower wages, customers through higher prices and shareholders through lower dividends, so we’ll all feel the pain somehow." 

Both Santander CIB and Citigroup now predict the fall in gas prices will bring inflation back to or close to the Bank of England’s 2pc target already by the end of this year. 

But increasing numbers of business leaders have expressed concern about the looming tax rise, which comes just as a generous policy enabling firms to offset investments against their HMRC bill ends. 

Runar Reistrup, an entrepreneur who ran the second-hand clothes app Depop before its sale to Etsy in the US for £1.6bn last year, warned that the changes will deter investment.

Mr Reistrup, who is now chief executive of freelancer platform YunoJuno, said: “If I was a starting a business I would think twice before basing it in the UK with the tax rise,” and added “it will hurt the UK’s ability to produce future tech unicorns."

The brighter consumer outlook is likely to raise hopes that any recession will be short lived. GfK's consumer confidence survey showed that sentiment had ticked up from where it was in January, to a reading of -38 from -45, although it remains significantly below levels from before the first Covid lockdown.

Joe Staton, of GfK, said:  “Consumers have suddenly shown more optimism about the state of their personal finances and the general economic situation, especially for the coming year. 

“A little consumer resilience might be what we need to soften any downturn in 2023."

However, Bank of England official Catherine Mann dismissed hopes of a rapid return to lower interest rates, saying that Threadneedle Street was too slow to begin increasing them and is now paying the price.

The hawkish policy-maker said more rises to borrowing costs would be needed to dampen inflation.

Speaking at an event organised by the Resolution Foundation think-tank, she said: “I believe that more tightening is needed, and caution that a pivot is not imminent."