The Chancellor has said it is “going to take time” to reduce the overall tax burden as he appeared to hint that further pre-election giveaways could be coming down the track.
Jeremy Hunt used the autumn statement on Wednesday to announce a national insurance cut worth £10 billion.
Yet despite the earnings bonus, millions of workers will face a squeeze on their finances with the tax burden still set to reach a record high.
In interviews after the fiscal event, Mr Hunt said taxes had risen to pay for Covid-19 pandemic support and Government intervention to help the public through the spike in energy prices triggered by the war in Ukraine.
But the Chancellor said the UK economy had since “turned a corner”, a result he argued had provided him with the opportunity to “lighten the tax burden” with national insurance reductions and savings for businesses.
If it is responsible to do so, if we can do so without increasing borrowing, then of course as a Conservative, I would like to bring down the tax burden— Chancellor Jeremy Hunt
The senior Conservative told Sky News: “We have made a start. I don’t pretend (and) I’ve never pretended that we were going to get there in one go.
“But what we can say is that, now we’ve halved inflation, the economy has turned a corner, we can focus on long-term growth, raising incomes and salaries for families up and down the country.”
Mr Hunt said he would entertain a cut to income tax in the spring budget “if it is responsible to do so”.
Bim Afolami, economic secretary to the Treasury, told BBC’s Newsnight that “it was not the end, it is the beginning” for tax cuts.
Tory MPs continued to clamour for the tax burden to be whittled down further after the autumn statement.
Sir Jacob Rees-Mogg, a former business secretary and ally of former prime minister Boris Johnson, told GB News: “We are being taxed too much. We need lower taxes, but we can’t do that without less Government spending.
“There are savings to be made and we need to be putting that into practice.”
At Wednesday’s autumn statement, the Chancellor cut the 12% national insurance (NI) rate on earnings between £12,570 and £50,270 to 10%.
He said the two percentage point reduction in the main rate of employees’ NI will save someone earning £35,000 more than £450 and the change would benefit 27 million people.
With a general election expected next year, the tax cut will be rushed through Parliament to take effect in January to boost Prime Minister Rishi Sunak’s chances at the ballot box.
Westminster watchers saw the decision to bring it forward from April as a possible signal that an election could be called in early 2024.
But the Chancellor told broadcasters he had not spoken to the Prime Minister about the prospect of a May election.
Mr Hunt on Wednesday also cut national insurance by an average £350 a year for around two million self-employed people from April.
But the continuing freeze in personal tax thresholds will wipe out the benefit of the NI reductions for many workers, as higher earnings see millions dragged into paying more to the Exchequer.
The decision to keep in place the freeze, rather than uprating them to account for rising inflation, will result in almost £45 billion of extra revenue for the Exchequer by 2028-29 as a result of “fiscal drag”.
The Office for Budget Responsibility (OBR) said that between 2022 and 2029 more than four million extra individuals will be earning above £12,750, leaving them liable for income tax.
Three million more will move into the 40% higher rate band and 400,000 more into the top 45% rate for those earning above £125,140, the OBR estimated.
Labour’s shadow business secretary Jonathan Reynolds told Newsnight that, even after the Chancellor’s fiscal statement, voters will be paying more tax by the next election than they were at the last in 2019.
Mr Reynolds said any discussion on whether Labour would change the tax thresholds would “have to be part of the election campaign, not at this stage before a budget”.
The OBR is set to provide further analysis of the autumn statement and UK economic situation during a briefing on Thursday.
In its assessment of the UK economy published alongside the autumn statement, the independent watchdog reduced its growth forecast for next year to 0.7% and predicted that inflation would be “more persistent” next year than it had anticipated.
Elsewhere, the Chancellor confirmed that a tax break allowing firms to cut their bills if they invest in new equipment will be made permanent, in what he claimed was the “biggest business tax cut in modern history”.
The full expensing regime – which means that for every £1 spent on qualifying investment a firm can cut their tax bill by up to 25p – will be worth almost £11 billion to businesses in 2028-29.
It is high inflation – fuelling increased earnings and prices and subsequently larger tax takes – which contributed to the £27 billion windfall which Mr Hunt used in part for the giveaways announced in his statement.
Spending the proceeds of higher inflation while not significantly increasing the budgets available to Whitehall departments means they could face a dramatic spending squeeze in the years after the election.
Paul Johnson, director of the Institute for Fiscal Studies, said relying on potential post-election cuts to departmental budgets and fiscal drag-style tax receipts could mean that Mr Hunt’s tax cuts “will not prove to be sustainable”.
Treasury minister Mr Afolami defended the decision on Newsnight, saying: “It is not a cut in public spending. Spending is going up less than it otherwise would have gone.
“We have chosen — and it is a political choice and I accept that — to give tax cuts to hard-working people on average earnings, I don’t apologise for that.
“I think that is the reasonable choice but public spending at the end of the forecast period, which is five years, is likely to be £85 billion more than it otherwise was.”
Other headline measures in the autumn statement included increasing benefits in line with September’s inflation figure of 6.7%, maintaining the state pension triple-lock to take it up by 8.5% from April and freezing alcohol duties until August 2024.
