Jeremy Hunt has got £12billion more “fiscal headroom” so he could be tempted to slash another 2p off National Insurance, say leading economists.
The Institute for Fiscal Studies said the public finances moving into the new fiscal year 2024/25, and looking ahead, means that the Chancellor could deliver a third 2p cut to NI, possibly just before an autumn general election, while still meeting one of his key rules.
It explained that on 6 April, the UK entered a new tax year and the Government’s forecast horizon rolled forward by a year.
So the Government’s fiscal mandate, which requires debt to be falling as a share of national income between the fourth and fifth years of the forecast period, now applies a year further into the future.
The IFS estimated that this “mechanical rolling forward” of the forecast could, “all else equal”, add something like £12 billion to the Chancellor’s ‘headroom’ against his fiscal mandate.
The leading economists stressed that “on the face of it”, it could allow for a third 2p cut to National Insurance in a pre-election giveaway.
However, they argued against “immediate and permanent tax cuts” especially given that the Government’s economic plans are based on “large, unspecified spending cuts in the next Parliament”.
Helen Miller, deputy director at the IFS, said: “Just by virtue of moving into a new tax year, Jeremy Hunt’s debt target has become easier to meet.
“The rolling forward of the forecast, coupled with a one-year extension of the planned post-election spending squeeze, could add something like £12 billion to his so-called ‘headroom’.”
She added: “This is a quirk of a poorly designed fiscal rule. It is not a sensible basis for more pre-election tax cuts. And it should not distract from the serious fiscal challenges facing the UK and the smorgasbord of difficult tax and spending choices awaiting the post-election Chancellor.
“The next government’s choices will determine the size and role of the state; the distribution of resources between different households, generations and regions; and the long-term sustainability of the public finances – these are the issues that deserve attention and debate.”
But Mr Hunt brushed aside several of such concerns to announce a 2p cut in National Insurance in the Budget, having done the same in the Autumn Statement last year.
The fiscal think tank estimates that the next Chancellor will inherit a forecast with a budget deficit of around £40 billion in 2029–30, which would be low enough to have government debt falling as a share of national income in that year (as is required by the government’s fiscal mandate).
But it stressed that this is predicated on the next government overseeing significant tax rises, allowing fuel duties to rise in line with inflation, cutting investment spending and delivering a return to austerity for many public services.
The IFS highlighted a few of the difficult choices facing the Chancellor, and the country, including:
* All personal tax thresholds are due to remain frozen in cash terms until March 2028: a substantial planned tax rise. Unfreezing thresholds would reduce revenues by £11 billion in 2029–30.
* A ‘temporary’ 5p cut to fuel duties is due to expire in March 2025, and fuel duties are due to rise in line with RPI inflation in each year of the next parliament – something that has not happened since 2011. Keeping fuel duties frozen would cost £6 billion in 2029–30.
* Current policy plans imply real-terms cuts to public investment of 2.6 per cent per year over the next parliament. Avoiding those would require increasing spending by £18 billion in 2029–30.
* Spending on public services is set to grow by one per cent per year in real terms over the next parliament, under current government policy. But ‘protecting’ the NHS, schools, childcare and defence budgets will mean that most departments will face real-terms cuts averaging three per cent per year. To avoid those would require around £20 billion of extra spending in 2029–30.
The IFS added: “Deviating from current policy on any one of the above would be enough to mean that debt is no longer meaningfully falling as a share of national income in 2029–30 but is merely stable. Doing even a subset of them could put debt on an ever-rising path and so breach the fiscal rules Jeremy Hunt and Rachel Reeves have both committed to.”
It also launched a new Be the Chancellor interactive tool, built in partnership with social good innovation agency Nesta, for people to see the tough choices ahead.
They can use the https://ifs.org.uk/bethechancellor tool to see the sums and calculations Mr Hunt and his predecessors including Rishi Sunak, Gordon Brown and Ken Clarke have had to make.
Ravi Gurumurthy, chief executive of Nesta, stressed: “The debate on the size of the state is prone to “cakeism”.
“Those who argue for tax cuts are often in denial that this requires more austerity. Advocates of higher spending are sometimes reluctant to say which taxes will need to increase.
“We ought to have a transparent debate on how we deal with an ageing society, the net zero transition and national security threats.
“This tool allows us to see the choices we face, and the difference they make. It ought to be the basis for comparing the plans of the major parties at the next election and coming up with our own.”
