Business

Jeremy Hunt will try to talk a long game while scrambling to fund pre-election tax cuts | Larry Elliott


When Clement Attlee took soundings from his cabinet on the timing of the 1950 election, the then chancellor Sir Stafford Cripps was adamant. The Labour government had to go to the country before the budget so that voters did not think the decisions made had been taken with polling day in mind.

Those were the days. As the 2024 budget approaches on Wednesday, the assumption is that Jeremy Hunt will do his utmost deliver a crowd-pleasing package of tax cuts.

The chancellor has done his utmost to hose down those expectations, telling the BBC’s Laura Kuenssberg show that he was preparing for a prudent and responsible, gimmick-free affair. Taxes should be lower, he argued, but only when affordable.

Even so, the Treasury has been exploring every avenue in its attempt to find a way of putting more money in the pockets of consumers while sticking to its self-imposed rule to be cutting debt as a share of national income in five years’ time.

Experience suggests this strategy won’t work. For a start, the sums involved will be relatively modest. The size of Hunt’s net giveaway on Wednesday is likely to be a maximum of £10bn, which is small beer in the context of a £2.5tn-a-year economy. The package will be smaller than last November’s autumn statement, which made no difference to the Conservative party’s dire opinion poll ratings.

Budgets actually matter a lot less than is assumed at Westminster. Most are forgotten quickly, and the ones that stick in the mind tend to do so for the wrong reasons. The most memorable fiscal event of the current parliament – Kwasi Kwarteng’s tax-cutting extravaganza in September 2022 – was not even a proper budget.

Giveaway budgets only work politically if they feel consistent with the economy’s direction of travel. In 1987, for example, Nigel Lawson was able to cut taxes because growth was strong, inflation was low, people were seeing their living standards rise, and the public finances were in good shape. Lawson cut the basic rate of income tax from 29% to 27% but he also cut government borrowing. The deep recession of the early 1980s seemed a long way in the past, although the scars persist to this day. Three months after the budget, Margaret Thatcher won her third election, with a majority of more than 100.

Hunt is in a more difficult position. The economy is in recession. Inflation is coming down but, at 4%, still double the government’s target. National output per head of population – a reasonable guide to living standards – has not risen in any of the past seven quarters and has fallen in six of them. The government will borrow upwards of £100bn this year to balance the books.

On the upside, the recession has been a lot milder than most forecasters were predicting a year ago, and is probably already over. A good leading indicator is the housing market, where activity and prices have both turned upwards. Inflation has come down more quickly than expected and unemployment has remained low. As Hunt said on Kuenssberg, the economy has shown some resilience in the face of three big shocks in the current parliament – the Covid pandemic, the cost of living crisis and the Ukraine war – and is now on the road to recovery. The next few months should see confirmation of that.

But clearly the economy is not in a 1987-style sweet spot, or anything like it. Even if living standards now start to rise again, there will be a lag before voters feel any improvement. If the economy is indeed on the turn, it may well be Rachel Reeves rather than the current chancellor who benefits from the lower borrowing that stronger growth will deliver.

Hunt has spent his time at the Treasury seeking to calm things down after Liz Truss spooked the markets with her unfunded tax cuts, and rather than pump-up demand has concentrated on measures to boost investment and labour market participation. In that context, the obsession with using the budget as a vehicle for tax cuts looks strange, and may prove counter-productive.

skip past newsletter promotion

An alternative strategy would be for Hunt to face down his noisy backbenchers and say that tax cuts are neither really affordable nor his current priority. If there is money available he should spend it on mending broken Britain: reducing NHS waiting lists, mending potholes, preventing more councils from going bust. Taxes may be at their highest level for seven decades but that is not what appears to be bugging the public. Rather, it is that they are paying considerably more tax but getting little in return.

Hunt believes the only sustainable way to meet public demands for better quality public services is to speed up the economy’s growth rate. So he would be better off ignoring the fact that this is a pre-election budget and instead concentrate on measures to improve the supply side of the economy, such as reducing the record number of people inactive due to long-term ill health.

This would be a political risk but not much of one, given that the likely outcomes for the Conservatives in the election are defeat and landslide defeat. Voters might respect Hunt more for sticking to a long-term approach. If things look markedly better in six months’ time than now, that would be the moment to show some generosity.

It’s not going to happen of course. Hunt wants to have it both ways. He will talk about taking decisions for the long term, while at the same time scrabbling around to find the cash for pre-election tax cuts. He runs the risk of getting an adverse reaction from the markets which would snuff out what is still a lukewarm and tentative economic recovery.



READ SOURCE