Jeremy Hunt: Tax cuts are virtually impossible

Jeremy Hunt has said that tax cuts ahead of November’s Autumn Statement are “virtually impossible” and has warned that he faces difficult decisions.

The Chancellor said there was no “extra headroom” to cut taxes, because of the need to prioritise the pledge to halve inflation this year to a level of around 5.3 per cent.

The Bank of England decided not to put up interest rates on Thursday, ending a run of 14 successive increases and raising the prospect that they may have peaked.

The decision to hold rates at 5.25 per cent means the amount of interest the Government has to pay on its debt will be lower than previously forecast – raising the possibility that the Treasury will have more to spare for tax cuts.

But interest rates are still far higher than the Office for Budget Responsibility (OBR) anticipated at the time of the Budget in March and are set to stay higher, meaning interest payments on the national debt will remain high.

Mr Hunt told LBC’s Tonight with Andrew Marr that high debt interest payments left him little room for giveaways.

He said: “If you look at what we are having to pay for our long-term debt, it is higher now than it was at the spring Budget.

“I wish it wasn’t, it makes life extremely difficult, it makes tax cuts virtually impossible, and it means that I will have another set of frankly very difficult decisions.

“All I would say is, if we do want those long-term debt costs to come down, then we need to really stick to this plan to get inflation down, get interest rates down.

“I don’t know when that’s going to happen. But I don’t think it’s going to happen before the Autumn Statement on Nov 22, alas.”

On Thursday, it emerged that government borrowing is now much lower than forecast in March.

Borrowing so far this financial year – £69.6 billion – is £11.4 billion less than predicted by the OBR, suggesting that Mr Hunt does have more headroom to make tax cuts.

Liz Truss, the former prime minister, is among those on the Tory Right calling for the Government to cut taxes ahead of the Autumn Statement.

The new figures come amid reports that the Tories are considering a promise to slash inheritance tax in their election manifesto.

Mr Hunt also cast fresh doubt on the future of the controversial HS2 rail line, saying taxpayers cannot be left on the hook for infrastructure projects that cost billions more than expected.

Asked if he could commit to the Manchester leg of the high-speed line being built, he said: “I’m not going to comment on discussions that are happening at the moment, because as Chancellor, you would expect me to be having discussions with the Prime Minister when major infrastructure projects overrun in their costs.

“And that’s what we’re facing with HS2 … I understand, but they [Red Wall MPs] will also be worried if we have an infrastructure project where the costs are getting totally out of control.

“We haven’t made any decisions on this. We are looking at all the options. But we do need to find a way of delivering infrastructure projects that doesn’t cost taxpayers billions and billions of pounds.”

The comments will intensify speculation that the future of the HS2 line will be the next of Rishi Sunak’s policy interventions, a day after he reversed many of his net zero policies.

On Wednesday, the Prime Minister pledged to be honest with people about the huge cost of policies, saying the public purse could not afford them all.

He announced in January that halving inflation by the end of 2023 was one of his five priorities.

The Bank of England’s 14 rate rises between December 2021 and last month have begun to bring down inflation, according to Andrew Bailey, the Bank’s Governor.

“Inflation has fallen a lot in recent months and we think it will continue to do so,” he said. 

“That’s welcome news. But there is no room for complacency.”

He raised the spectre of a further rate rise if inflation does not keep dropping towards the bank’s 2 per cent target.

Inflation slowed to 6.7 per cent last month, down from last October’s high of 11.1 per cent. 

High inflation has raked in extra tax revenue for the Chancellor, but higher borrowing costs have also pushed up Government spending on the £2.5 trillion national debt.

The Exchequer borrowed another £11.6 billion last month, according to the Office for National Statistics – £3.5 billion more than in the same month of 2022, as spending increased faster than revenues.

So far this financial year, the Government has borrowed £69.6 billion. That is £19.3 billion more than it borrowed in the same period of last year, but given it is less than the OBR predicted there are hopes the Chancellor may have a little more breathing room.

However, Carl Emmerson, deputy director of the Institute for Fiscal Studies (IFS), cautioned that only small or temporary tax cuts might be justifiable given the pressures facing the public purse.

The improvement in the public finances compared with the OBR’s forecasts “can’t really be used to pay for a permanent tax cut of any size”, he said.

Even if borrowing is below the OBR’s forecasts, the figures will still likely be worse than the fiscal watchdog expected back in 2022. 

The Chancellor was only on track “by a hair’s breadth” to meet his target of getting debt falling, said Mr Emmerson.

‘Big problem’

Paul Johnson, the director of the IFS, said that even though levels of borrowing were set to fall, the accumulated national debt in the wake of the pandemic remained a “big problem”.

He told BBC Radio 4 that while both Labour and the Conservatives were committed to reducing the national debt, which is at the highest it has been since the 1960s, it would prove difficult.

He said: “It’s hard for several reasons – one is that we’re paying an awful lot of debt interest payments, more than we have in generations. We’re already increasing taxes, and that’s not enough to offset this increase in debt. 

“And the third issue is that this is happening despite the fact that the plans for spending set out in the Budget are really very tight.”

Philip Shaw, an economist at Investec, said it should ultimately be possible to find room for some tax cuts.

“Mr Hunt will be keen to reinforce his fiscal credibility at November’s Autumn Statement and refrain from loosening the purse strings,” said Mr Shaw.

“However, unless we see a material turn for the worse in the direction of public borrowing, we sense that some tax cuts will be forthcoming in the Budget next spring, even if the Chancellor has to reach deep down the back of the sofa to find the cash to be able to do so.”