Jeremy Hunt is considering making billions of pounds of spending cuts to fund pre-election tax cuts in the next budget, according to a report.
The chancellor is looking at “further spending restraint” after 2025 if official economic forecasts suggest he does not have enough headroom to pay for “smart tax cuts”, the Financial Times reported, citing Treasury insiders.
The newspaper said Treasury officials were looking at reducing the projected rise in public spending from 2025 onwards to about 0.75% a year, which would release £5bn to £6bn for tax cuts in this spring’s budget.
Economists have warned that even the current plan for a 1% real-terms increase in public spending every year until 2029 is a fiction. This would require serious cuts in stretched public services.
The cuts would have to be made in unprotected departmental budgets such as adult social care and Ministry of Justice funding for courts and prisons. NHS and schools spending is protected.
Torsten Bell, the chief executive of the Resolution Foundation thinktank, said last year that Hunt’s giveaways relied on “implausible austerity”.
Labour believes that Hunt has baked in these cuts from 2025 onwards as a political trap. During the election campaign the Tories could challenge Labour on whether it would make the cuts or spend more.
If Labour decides on the latter, the Tories could argue Labour is planning to cover that extra spending with tax rises and accuse the party of preparing a secret “tax bombshell”.
Hunt is considering cutting public spending further because tax cuts are seen as an essential political weapon before a general election. An election is expected later this year.
The government’s headroom has become more limited because of higher borrowing costs caused by interest rates remaining high. In December, for the fourth time in a row, the Bank of England decided to hold the base interest rate steady at 5.25%. The base rate is what the Bank charges other lenders to borrow money.
A Treasury insider told the FT: “It doesn’t look like the chancellor will have as much space for tax cuts compared to last autumn, so senior folk internally are starting to look at further spending restraint and productivity gains in the future if the numbers move against us again. It is a tough call, but it isn’t clear whether there will be easier alternatives.”
Hunt would prefer to cut taxes without cutting future spending, which would draw criticism. His decision depends on how much fiscal headroom the Office for Budget Responsibility gives him. Its latest forecasts were handed to the Treasury on Wednesday.
The Bank of England is expected to cut the base interest rate during the course of this year.
