Jeremy Hunt is to cut national insurance by 2p in his budget on Wednesday, the Guardian understands, in a move designed to offer voters a pre-election giveaway but which could mean steeper spending cuts after the election.
The UK chancellor is preparing to announce the second big cut to employment taxes in a year, after his decision to cut national insurance rates by 2p at last year’s autumn statement.
Wednesday’s move should save the average earner £450 a year, which combined with last year’s cut will add up to £900. However, the chancellor has been looking at further public spending cuts after the election as one way to pay for the tax reduction, despite economists’ warnings that such a move would cause public services to buckle.
Hunt and the prime minister, Rishi Sunak, have spent the last few weeks looking for ways to offer a tax cut on the scale of that announced last year as a way to boost the Conservatives’ flagging poll ratings in their last budget before an election.
Sunak had urged the chancellor to focus on reducing income tax instead, which is more costly to cut but better understood by most voters. Since last year’s national insurance cut, the party’s poll deficit has widened by one point from 19 points to 20.
Treasury officials said, however, that any personal tax cuts should be focused on working people.
Sunak also appears to have been persuaded by the fact that unlike income tax, which is partly devolved in Scotland, national insurance is a UK-wide tax. The prime minister told reporters in Scotland last Friday: “I’m very conscious that, whilst the SNP is making life harder for hard-working people by putting their taxes up, I want to make life easier for people.”
Conservative whips have been told to prepare to rush through emergency legislation after the budget, something that would be needed to enact a national insurance cut.
Sunak promised to reduce income tax rates when he was chancellor, but this was reversed by Hunt in his first autumn statement in 2022 as the government scrambled to undo the damage done by his predecessor Kwasi Kwarteng’s “mini budget” a few months earlier.
While a cut in national insurance would on its own save workers hundreds of pounds a year, the effect of the tax cut would be outweighed by the Treasury’s decision to freeze the salary thresholds for both national insurance and income tax in cash terms.
Calculations by the Resolution Foundation show that only those paid between £27,000 and £59,000 a year will be better off as a result of both the autumn statement and Wednesday’s budget, once the freeze in thresholds are accounted for. Those paid £16,000 will lose almost £500 a year, as will those receiving more than £60,000.
Government sources say forecasts provided by the Office for Budget Responsibility last month provided the chancellor with about £13bn to spend before breaking his promise to have debt falling as a percentage of economic output in five years’ time.
Hunt is expected to announce a series of revenue-raising measures on Wednesday to help pay both for the cut in NI, which would cost about £10bn a year, and for another freeze in fuel duty, which would cost another £5bn.
Measures that have been discussed include limiting tax breaks to non-doms, introducing a levy on vaping products, increasing taxes on short-term holiday lets, extending the energy windfall tax and increasing taxes on business-class flights.
Calculations by Labour suggest these measures could cumulatively raise a further £5bn.
The chancellor has also been considering reducing the forecasts for public spending after the election. The forecasts set after the autumn statement assumed departmental budgets would rise 1% above inflation each year during the next parliament, but Hunt has been looking at bringing that down to 0.75%.
Such a move would raise between £5bn and £6bn a year. But economists have warned such it would also mean cutting the budgets of unprotected departments, including justice, local government and the Home Office, by about 20% over the course of the parliament.
