UK’s hefty tax cuts mean next finance minister must face up to some hard truths

[LONDON] British finance minister Jeremy Hunt’s latest throw of the dice in his Autumn Statement budget is unlikely to do much to boost the prospects of Prime Minister Rishi Sunak’s Conservative government at the next election, which is likely to be called soon.

Hunt has gambled £20 billion (S$33.8 billion) on the biggest package of tax cuts since 1988. One of the centrepieces of his budget is a cut in national insurance contributions by 27 million workers – by two percentage points, to 10 per cent.

He also announced a permanent tax break for corporate investment, a move cheered by businesses. The government’s fiscal watchdog later said the UK’s overall tax burden was due to rise to the highest levels since World War II.

As things stand, it does not look like the needle will move much when it comes to predicting the outcome of the election. Over the past year, the polls have shown that the opposition Labour holds a commanding 20 per cent lead over the Conservatives, which points to Sunak heading for a landslide defeat.

The latest polls conducted by the British newspapers show that voters remain dissatisfied with the Tories despite Hunt’s pledges to cut taxes. One poll by the Observer put Labour’s support at 42 per cent (from 40 per cent a week ago), with the Conservatives far behind on 26 per cent.

Mike Brewer, chief economist of the Resolution Foundation, a think tank that looks at how to raise living standards in the UK, said: “Hunt got his pre-election giveaways in early, with the Autumn Statement offering tax reductions today at the price of implausible spending cuts tomorrow.”

He added: “The Autumn Statement’s £20 billion of tax cuts compare to around £90 billion of tax rises (including higher corporation tax) already announced in this (term of) parliament. So despite the tax-cutting rhetoric, taxes are rising by 4.5 per cent of GDP between 2019-2020 and 2028-2029, equivalent to £4,300 more per household.”

Paul Johnson, director of the independent Institute for Fiscal Studies (IFS), said Hunt’s package of tax cuts was almost entirely funded by swingeing real-term reductions to public spending planned from 2025.

“While the government is committed to funding the National Health Service, those facing the steepest cuts are schools, defence and overseas aid, higher education, local governments, prisons and the courts,” he said.

Johnson added that the scale of the cuts would be harder to achieve this time, because of the austerity measures that kicked in when David Cameron was prime minister between 2010 and 2016.

Not all were unhappy with Hunt’s speech, however. Rain Newton-Smith, the chief executive of the Confederation of British Industry (CBI), which lobbies on behalf of larger British businesses, noted that the Autumn Statement adopted three of the CBI’s flagship policies.

These are the permanent write-offs of direct investment in factories, plant and equipment; introducing a competitive and simplified research and development tax credit scheme; and building electricity transmission infrastructure.

“These three large interventions will support businesses and the wider British economy,” he said.

As the clock ticks towards the next election, Johnson from the IFS said that whoever becomes the next finance minister will “have to face up to some hard truths”.

“A combination of high spending on debt interest, low growth and demands of an ageing population, means there is little leeway to spend on hard-pressed public services. The proviso is that tax is raised,” he said.

Labour’s shadow chancellor of the exchequer Rachel Reeves, whom many see as a potential successor to Hunt after the election, was critical of the government’s performance over the past decade.

“Over the 13 years of this low-growth Conservative government, the UK languishes in the bottom third of OECD (Organisation for Economic Co-operation and Development) countries,” she said. “There are 27 OECD economies that have grown faster than us since 2010, including the US, Australia, Canada, Sweden and Slovenia.”