Analysis-British tax cut spells trouble in store for next government

By William Schomberg

LONDON (Reuters) – British finance minister Jeremy Hunt’s big tax cut surprise could help the ruling Conservatives recover some favour among voters, but it threatens to store up budget problems for whichever party wins power after the expected 2024 election.

Hunt was cheered by Conservatives in parliament on Wednesday when he said he would lower social security contributions for employees by a bigger-than-expected two percentage points, along with a smaller cut for self-employed workers.

Combined with his decision to make permanent the incentives for business investment announced earlier this year, Hunt’s package of tax cuts would be worth about 20 billion pounds ($25 billion)a year by the 2028/29 tax year.

That represented Britain’s biggest giveaway package since 1988, apart from the huge tax cut plans last year of former Prime Minister Liz Truss which hammered the bond market and were quickly dropped, the Resolution Foundation think tank said.

The size of Wednesday’s cuts is dwarfed by the big tax increases rushed out by Hunt and Prime Minister Rishi Sunak a year ago as they moved to quell the storm unleashed by Truss.

Those rises still leave Britain on course for its highest tax burden since World War Two, something the opposition Labour Party’s would-be finance minister Rachel Reeves called the fruit of “13 years of Conservative economic failure”.

Labour has a roughly 20-point lead in opinion polls, with an election likely to be called in the next 12 months.

Leading think tanks said the design of Wednesday’s measures taken on their own would benefit some lower earners and could improve Britain’s low levels of business investment which are a factor in holding the economy in its slow-growth mode.

But the next government will find it hard to stick to the profile for the public finances implied by Hunt’s Autumn Statement plan, they said.

“The giveaways announced today are funded by handing whoever wins the next election implausibly large spending cuts,” Torsten Bell, chief executive of the Resolution Foundation, said.

‘MATERIAL RISK’

Many public services in Britain have suffered deep funding cuts since the financial crisis of 2007-08 once inflation is taken into account, and the impact of the surge in price growth over the past two years will add to that squeeze.

Economists at Investec said Hunt’s small 13 billion pounds of fiscal headroom – the money his own budget rules allow for more giveaways to voters or to set aside for a future downturn – depended on very tight spending controls that would cut the budget deficit to levels not seen in more than 20 years.

Hunt is likely to remain under pressure from within his party to go further with more tax cuts in a final pre-election budget statement expected in March.

David Jones, a former Conservative minister, welcomed the announcement as “a move in the right direction”.

But how much further Hunt can go is fraught with risk.

The economic growth assumptions of the Office for Budget Responsibility, which underpin Hunt’s plans, might be modest but they are more upbeat than those of the Bank of England which sees a flat economy in 2024 and 2025.

That kind of stagnation would make it even harder for Hunt’s sums to add up.

Paul Johnson, head of the Institute for Fiscal Studies, said the price of the tax cuts – combined with the huge cost of servicing Britain’s 2.6 trillion-pound debt – would be very low increases in spending on services and cuts in public investment, potentially undermining his aim of boosting growth.

“There’s a material risk that those plans prove undeliverable and today’s tax cuts will not prove to be sustainable,” Johnson said.

($1 = 0.8025 pounds)

(Reporting and writing by William Schomberg; additional reporting by Elizabeth Piper; editing by Alexander Smith)