Britain faces a “nasty combination” of high tax and tight public spending after the next general election, leading economists warned on Friday as doubts grew over Jeremy Hunt’s room for Budget giveaways.
The grim warning from the Institute for Fiscal Studies came as the Chancellor, pictured, and his Labour counterpart, Rachel Reeves, clashed over tax cuts as they both sought to sharpen general election battlelines.
The Government dangled the prospect of more tax cuts ahead this year if the fight to force down inflation towards two per cent can be won.
But Labour accused ministers of increasing overall bills due to “stealth taxes” dragging millions more people into paying the higher rate of tax or into paying the basic rate.
One of Mr Hunt’s junior Treasury ministers, Gareth Davies, was sent out on the media round to highlight the cut in National Insurance announced in the Autumn Statement, which many workers were set to see in their pay packets today.
He said: “We have got to keep with the plan to get inflation coming down. It’s gone from 11 per cent to four per cent. That’s a great achievement, but we have got to keep going further, and that we enable us to cut taxes further in the year.” But Ms Reeves tweeted: “Under Rishi Sunak’s Raw Deal, for every extra £10 you pay in tax, you only get £2 back.”
Mr Hunt’s leeway for tax giveaways in the March Budget may be more limited than hoped for by Tory MPs, with the “fiscal headroom” said to be currently around £14 billion, similar to the £13 billion at the Autumn Statement.
Independent experts believe it could be around £20 billion in March, though it can rise or fall quite sharply dependent on the state of the economy.
But they also stress that the tax cutting aims appear dependent on very tight spending on public services in future years.
Paul Johnson, director of the IFS, emphasised that economic forecasts for low growth and high debt interest payments “makes for a nasty combination of high tax/tight spending” if both the Tories and Labour are to achieve their aim to cut the debt mountain as a share of GDP.
Meanwhile, the Government’s attempts to claim a so-called “Brexit dividend” suffered a fresh blow as it halted trade talks with Canada, with discussions breaking down due to a disagreement over beef and cheese.
The rift could hit UK exports of cars and cheese to Canada.
