‘Tax sandwich’ on offer despite Chancellor’s promise of March cuts
Chancellor Jeremy Hunt will have over £20bn to spend on tax cuts in the Spring Budget, but whatever cuts are announced will be sandwiched between hefty tax rises, a leading think tank said.
Lower interest rate expectations are likely to increase the Chancellor’s headroom from £13bn in the Autumn Statement to £23bn this spring, according to the Resolution Foundation.
Headroom refers to the fiscal space the Chancellor has to meet his self-imposed fiscal rule of having debt falling as a proportion of GDP in the fifth and final year of the Office for Budget Responsibility’s (OBR) forecast.
Although Jeremy Hunt will have more space for tax cuts than in the autumn, the Resolution Foundation noted that £23bn would be below the average level of headroom that Chancellors have had since 2010.
Nevertheless, the Conservatives have made it clear that they will cut taxes in the Spring Budget in a bid to improve their electoral prospects in the election.
Options on the table include cutting the basic rate of income tax by 1p or cancelling the Personal Allowance freeze, both of which would cost around £7bn. The planned increase to fuel duty will also almost certainly be scrapped at a cost of £2bn next year.
If the Chancellor announces £10bn in tax cuts on 6 March on top of the £10bn announced in November, this would see £9bn of net tax cuts introduced in the election year taking into account the impact of frozen thresholds.
But the Resolution Foundation said the UK is really being offered a “a tax sandwich”.
In 2023-24, tax rises worth around £20bn were introduced, including freezing personal tax thresholds and increasing Corporation Tax.
The government has also announced tax increases worth £17bn for after the election, including a Spring 2025 Stamp Duty rise and three extra years of tax threshold freezes.
“Juicy tax cuts in this election year are sandwiched between far bigger tax rises already introduced last year,” James Smith, research director at the Resolution Foundation said.
“And highly unusually the government has already announced plans for a chunky package of tax rises that will come into effect after polling day,” he continued.