Britain's Conservative government will try to win favor with voters by cutting taxes but avoiding worsening inflation in a budget statement Wednesday, coming ahead of a likely national election next year that opinion polls suggest it will lose.
Prime Minister Rishi Sunak has hinted that tax cuts are back on the agenda now that his self-imposed pledge to halve inflation this year has been met and government revenue is higher than anticipated.
In a speech Monday, Sunak raised expectations that Treasury chief Jeremy Hunt's autumn statement will begin reducing the tax burden in the U.K., which is the highest in 70 years in the wake of COVID-19 and the energy price spike triggered by Russia's invasion of Ukraine.
Sunak said Monday that his government would “cut tax and reward hard work” but would “avoid doing anything that puts at risk our progress in controlling inflation."
Inflation eased to 4.6% in October from a year earlier after hitting a 41-year high of 11.1% in the same month of 2022.
“Now that inflation is halved and our growth is stronger — meaning revenues are higher — we can begin the next phase and turn our attention to cutting tax,” he said. “We will do this in a serious, responsible way, based on fiscal rules to deliver sound money.”
Sunak became prime minister in October 2022 after the short-lived premiership of Liz Truss, which foundered after a series of unfunded tax cuts roiled financial markets and led to a sharp drop in the pound and big increases in mortgage rates. Sunak succeeded her on the promise that he would stabilize the British economy after the turmoil.
Measures to bolster business investment are expected to take center stage in Hunt's statement, alongside efforts to trim the welfare budget by getting the long-term sick back into work — a move sure to attract accusations that the government is hammering society's most vulnerable.
Hunt said Tuesday that he will "focus on how we boost business investment and get people back into work to deliver the growth our country needs.”
Many voters will be most interested in whether Hunt cuts personal taxes, on such things as incomes, or waits until his main annual budget statement in the spring, which could act as a launchpad into a general election.
There's also been speculation that Hunt may slash inheritance tax, a move that would help the wealthy. However, with only about 4% of estates having to pay inheritance tax, any such move will likely trigger an angry response that the government is opting to help the rich amid a cost-of-living crisis.
The election must be held by January 2025, with speculation focusing on May or sometime next fall.
Opinion polls for months have put the governing Conservative Party, which has been in power since 2010, well behind the main opposition Labour Party and headed for likely defeat.
With the public finances still stretched, economic growth muted at best and inflation still more than double the Bank of England's target rate of 2%, experts have warned that the government hasn't got much room to maneuver.
“Hunt will probably hope that the economic backdrop can improve ahead of his next budget in spring 2024 by enough to give the economy a quick shot in the arm before the voting booths open,” said Kallum Pickering, senior economist at Berenberg bank.
The Bank of England, which has sought to cool spending and inflation by raising interest rates sharply over the past couple of years to a now-15-year high, warned that the fight is not over yet.
“We are concerned about the potential persistence of inflation as we go through the remainder of the journey down to 2%," bank Gov. Andrew Bailey told a committee of lawmakers Tuesday.
Arguably, cutting personal taxes will make that “journey” more difficult because it would likely raise consumer spending, thereby ratcheting up price pressures.
