Jeremy Hunt is due to set out the government’s plans for tax and spending in his budget on Wednesday. In what is expected to be the last budget before a general election, the chancellor’s biggest giveaway is likely to be a further cut to the national insurance contributions paid by employees, after a 2p reduction in his autumn statement.
Meanwhile, the Office for Budget Responsibility (OBR) will publish updated economic forecasts and an assessment of the government’s finances for the next five years – running beyond the next election to 2029. Here is what to expect.
Personal tax cuts
The personal allowance – the amount people can earn before starting to pay tax – and the thresholds for the higher and additional rates – are to be frozen again. This means that as wages increase, more people will be pushed into higher-rate tax bands. This trend is forecast to increase the overall tax rate above 37% of GDP by 2028 – the highest in modern times, according to the Institute for Fiscal Studies thinktank.
However, Hunt is expected to spend £10bn on a headline tax cut – reducing the national insurance contribution rate by 2p, from 10% to 8% of pay. This comes on top of a 2p cut in the autumn statement, which reduced the rate from 12% to 10%. The cut will reportedly take effect from April this year.
Fuel duty
Fuel duty has not risen for 15 years and it is widely expected that the chancellor will freeze it again. He is also expected to extend the 5p cut to fuel duty, which was introduced in 2022 and is due to run out this month. Combined, the measures will cost an estimated £5bn.
Tax rises
With economic growth flatlining, there is not much spare cash to fund Hunt’s budget giveaways. The money for personal tax cuts will need to be raised through tax rises in other areas and further cuts to public services. There is speculation that the tax reliefs for UK residents who claim non-dom status will be reduced, with potential savings of £2bn a year.
A new vaping levy will raise £500m, while higher taxes on second homes used as holiday lets could raise a few more hundreds of millions of pounds.
Hunt is also considering extending the windfall tax on the profits of North Sea oil and gas companies, introduced in May 2022 after Russia’s restriction of the gas supply into Europe led to record prices on the global gas markets.
Public service cuts
The chancellor is considering reducing an already bare-bones 1% increase in public spending above inflation to just 0.75%. The warning is that after a series of unfunded pay settlements for nurses and other public sector workers, and a period of rampant price increases affecting public services, this could lead to significant shortfalls in the cash available to the NHS and other areas of Whitehall. The move would raise £5bn to £6bn a year.
Hunt has also announced a public sector efficiency drive that he hopes will bring £1.8bn in savings by 2029. He says his plan “will free up thousands of police officer hours”, with less time spent on admin and more on tackling crime.
Councils will also be asked to make efficiencies by using fewer consultants and scaling back diversity training, and have been asked to produce their improved productivity plans by July.
Government finances
The OBR, which is independent of government, will come out with its latest predictions for the economy. It is expected to forecast lower inflation and lower interest rates this year than it did at the autumn statement in November. Lower inflation will lift the pressure of rising prices from public services, and lower interest rates will cut Hunt’s debt bill.
However, last year’s recession will probably mean the OBR revises down its prediction made in November of 0.7% growth in gross domestic product (GDP) this year and 1.4% in 2025. The likelihood is that the forecasts more closely follow the Bank of England’s 0.2% this year and 0.6% in 2025. The bad news for the chancellor is this reduces tax receipts from households and businesses.
The swings and roundabouts are expected to leave Hunt better off, but with only a modest increase in the £13bn of spending headroom he had in November without some extra tax rises or a reduction in spending on public services.
The chancellor has said he will meet a self-imposed debt rule that forces him to bring down the debt-to-GDP ratio in the final year of a five-year forecast.
