Jeremy Hunt will fuel inflation if he announces a tax cut which “puts money quickly in people’s pockets,” leading economists warned on Monday.
The Institute for Fiscal Studies argued that now is not the time for “big net tax cuts” as the Government has been mulling lower income tax, inheritance tax or National Insurance, as well as reducing business levies in the Autumn Statement.
The fiscal event is aiming to boost business investment and encourage more people back into the workforce.
The IFS stressed that some of the Chancellor’s fiscal “headroom,” possibly higher than previously expected at around £25 billion, is an “illusion” as more has been raked in from higher tax receipts in cash terms but funding for public services had not been increased to take into account high inflation.
Its head of tax Helen Miller added that the headroom was smaller than historically, there were “very tight” spending pressures, in the short term to deal with NHS waiting lists over 7.7 million and in the longer term to pay for an ageing population, and that inflation is still high.
“This is not the time when it is going to be easy or even necessarily a good thing to be cutting taxes,” she told BBC Radio 4’s Today programme.
“It’s not a good time to be having big, net tax cuts.
“Big picture, when you do a tax cut, people have more money in their pockets and they go out and spend it, that is what increases pressure on inflation.
“If he does a tax cut which puts money quickly in people’s pockets and it’s the kind of people who spend money quickly, so think of lower earners, yes then that would be pushing up inflation.
“If he does something like inheritance tax, it will have a lower effect because it is only affecting a tiny number of people with a delay.”
She also warned of the “troubling pattern” of governments raising borrowing when economic forecasts are less favourable and doing “giveways” when they are better than expected which is a “sure fire way” to have debt ratcheting up.
A Treasury minister admitted some tax cuts would fuel inflation, at 4.6 per cent in October, amid speculation that Mr Hunt could seek to avoid this by largely targeting tax cuts to businesses rather than individuals as this may have less impact on pushing up prices.
Exchequer Secretary Gareth Davies insisted a “sound money” policy would not be sacrificed in a dash for tax cuts and economic growth.
He told Times Radio: “There is a lot of analysis which suggests some taxes add to inflation and others don’t.
“But I can tell you for the Autumn Statement, we are focused on getting the economy growing.”
He added that there were “a lot of moving parts” as the Government seeks to identify the best fiscal plans to boost economic growth without pushing up prices.
“We’ve always been clear that if we reduce the tax burden we can’t do so at the expense of sound money,” he told GB News.
“And we certainly don’t want to fuel inflation with a tax cut.”
He added: “That’s why we had inflation as our number one target. And it’s meant that we’ve had to take some very difficult decisions. We’ve got too high a debt and so we need to be mindful of that too. So there’s a lot of moving parts, but ultimately, inflation remains our number one target.”
The Prime Minister was set to hail having last week hit his pledge of halving inflation this year as he gives an update on the state of the nation’s finances in London.
Mr Hunt suggested during a round of interviews on Sunday that the personal tax burden will not come down “overnight” as he seeks to avoid prices spiralling again.
The Chancellor made clear to Times Radio that his “priority is backing British business” and changes that “unlock growth”.
Pressed if income tax could be eased, he stressed the need to act “in a responsible way”.
Mr Hunt said he will not take any actions that would “jeopardise” the fight against inflation.
Shadow chancellor Rachel Reeves warned that cutting inheritance tax during a cost-of-living crisis would be wrong amid some Tory unease over the possible move.
While it would be popular with the Conservative right who have been clamouring for tax cuts, other Tories warned it is not the right time to give a handout for the wealthy.
Ms Reeves told the BBC’s Sunday With Laura Kuenssberg programme: “Cutting inheritance tax in the middle of a massive cost-of-living crisis and when public services are on their knees is not the right priority.”
She also rejected Mr Hunt’s argument that he needs to take “difficult decisions” on welfare payments.
Typically, ministers use the September figure for inflation when uprating working-age benefits, which would mean a 6.7 per cent hike.
However, the Chancellor has been considering using October’s far lower figure of 4.6 per cent, which economists say would cut spending by around £3 billion.
The savings would largely affect working-age households receiving disability or means-tested benefits, according to the IFS.
Only about four per cent of deaths in 2020/21 resulted in inheritance tax being paid, with exemptions allowing many couples to pass on up to £1 million tax-free.
Inheritance tax is charged at 40 per cent on estates of more than £325,000, with an extra £175,000 towards a main residence passed to direct descendants.
Abolishing it entirely could cost £7 billion a year in the short term, but the IFS forecast this could rise to more than £15 billion by 2033.
Meanwhile, a leaked recording obtained by the Telegraph showed Paymaster General John Glen questioning universal winter fuel payments to wealthy pensioners.
Mr Glen, then the chief secretary to the Treasury, asked at a Cambridge University Conservatives event last month whether the triple lock on pensions was “sustainable”.
The Treasury ruled out a change to the winter fuel allowance in the autumn statement, with a spokesman saying: “This is not something we are going to do.”
Mr Davies said there were “no plans” to reduce the number of pensioners eligible to receive winter fuel payments.
