Jeremy Hunt’s Spring Budget: Should tax cuts be made?

The year began with Chancellor Jeremy Hunt receiving good news about fiscal headroom and talking bullishly about lower taxes as the run up to the Spring Budget got underway.

Now a series of reports have served to warn Mr Hunt about the dangers involved with making tax cuts. Here we take a look at some of those warnings and what they may mean when the Chancellor delivers his speech on 6 March.

Unrealistic spending cuts

The most recent body to publish a report was the International Monetary Fund (IMF), which ‘advised the UK against further tax cuts’ as part of an assessment of the world economy.

It said preserving public services and investment implied higher spending than was reflected in the government's current spending plans.

The IMF suggested the Treasury's pencilled-in spending cuts from this year were ‘unrealistic’.

The IMF also downgraded its forecasts for UK growth next year from 2% to 1.6%. The UK's growth last year and this year is expected to remain sluggish at below 0.5% and 0.6% respectively, the second slowest in the G7 major economies and behind Germany, according to the IMF.

The IMF also assumes that interest rates will remain at 5.25% in the first half of this year.

Critical public investment

Pierre Olivier-Gourinchas, IMF Chief Economist, said:

There is a need to put in place medium-term fiscal plans that will accommodate a very significant increase in spending pressures.

In the case of the UK, you might think of spending on healthcare and modernising the NHS; spending on social care; on education; you might think about critical public investment to address the climate transition; but also to boost growth.

In that context we would advise against further discretionary tax cuts as envisioned and discussed now.

Work of fiction

The IMF’s advice followed an unusually harsh intervention from Richard Hughes, the Head of the Office for Budget Responsibility (OBR), who criticised the support he gets from the government to help him forecast public spending.

Mr Hughes was answering questions from the Economic Affairs Committee of the House of Lords; he said the OBR’s forecasts were based on ‘questionable assumptions’.

He stated:

Some people call the projections a work of fiction, but that is probably being generous when someone has bothered to write a work of fiction and the government hasn’t even bothered to write down what its departmental spending plans are underpinning the plans for public services.

Big decisions and trade offs

The Institute for Fiscal Studies (IFS) recently said that promises of tax cuts during general election campaigns may have to be rolled back as the UK economy faces some of its worst problems since the 1950s.

The next government is likely to face some of the most difficult economic and fiscal choices the UK has faced outside of pandemics, conflicts and financial crises, according to the IFS.

The winners of the next general election will face a combination of high debt interest payments and low expected growth, making it difficult to reduce public debt.

The IFS says they will ‘face some big decisions and trade-offs’ and will need to be honest about those choices.

Responsible and sensible

Mr Hunt appeared to acknowledge that this would be necessary in recent comments to the BBC.

He said:

It doesn't look to me like we will have the same scope for cutting taxes in the spring Budget that we had in the Autumn Statement. And so I need to set people's expectations about the scale of what I'm doing because people need to know that when a Conservative government cuts taxes we will do so in a responsible and sensible way.

But we also want to be clear that the direction of travel we want to go in is to lighten the tax burden.

Spring Budget

The Chancellor will deliver the Spring Budget, alongside a forecast from the independent Office for Budget Responsibility (OBR), on 6 March. 

Mercia’s tax experts will be watching and will provide detailed analysis of the day’s announcements. Keep your clients up to date with our range of digital and printed products.