| Following hints dropped by Jeremy Hunt over the weekend about potential tax cuts, there has been a lot of speculation about what exactly could be on the table. Initially, headlines focused on inheritance tax, a “totemic” issue for the Conservatives, Richard says. As a policy, raising the level at which it is paid – or scrapping it entirely – would not cost the government a lot, nor would it be inflationary, but the government appears to have had second thoughts about putting money into an area that would disproportionately benefit the richest. It may also be something they wait until the spring to announce: “That would give them more time to see how the economy performs,” says Richard. “They also might want to announce things closer to the next election to give them the most bang for their buck.” In terms of other personal tax cuts, many people will be closely watching news surrounding income tax and national insurance. A 1% cut to income tax would cost the government £6.5bn, which is a decent chunk of the £17bn windfall from reduced borrowing, but still relatively affordable. On the face of it, this could be a popular policy choice, however Richard says that it’s important to note that there are large increases in taxes happening by policies that are already in place. The six year freeze on income tax thresholds is estimated to raise over £50bn, as inflation drags millions of people into paying income tax for the first time. “So even if they announced a 1% cut in income tax, economists expect that overall people will still be paying more tax,” Richard adds. Other things to look out for include stamp duty reforms and business tax cuts. Why has the government changed its tune on tax cuts? There is a clear political incentive for the chancellor: many backbench MPs have been calling for tax cuts, frustrated that a Conservative government has overseen the highest tax levels since records began 70 years ago. Lower taxes are a “classic part of conservative ideology”, Richard says, and given that Sunak has been under significant pressure from those within his own party to revitalise the Tories’ performance, it would seem like a simple place to start. “They see [tax cuts] as one way to try and turn around their chances at a general election next year,” Richard adds. Sunak has also hit his target to halve inflation (as he has told anyone who will listen). Inflation now sits at around 4.6% (largely thanks to falling energy prices), and the government believes it can move from stabilising the economy into the next stage of growth and tax cuts. “They’ve always been concerned that the tax cuts would be inflationary because when you put more money into people’s pockets, they have more money to spend and that can lead to inflation,” Richard explains. The other reason is more obvious: public finances performed more strongly this year than expected, with government borrowing around £17bn lower than was anticipated in March. As a result, Hunt could have as much as £25bn to spend, up from £6.5bn in the spring, according to one economic consultant. All of these factors combined have meant that “the government sees an economic rationale for cutting taxes”, Richard says. What about benefits and pensions? Welfare recipients could be impacted by today’s statement, if the chancellor decides to increase benefits by a lower amount next year. Traditionally, the treasury increases the value of benefits each year using inflation data from September, which was 6.7% this year. However there has been a lot of speculation that the government could use October’s inflation data, which, at 4.6%, was considerably lower and would save the government billions. Richard predicts that the government might not go through with this as it could be politically damaging: “They wouldn’t want to walk into an election year being portrayed as the nasty party that cuts taxes for the rich and targets poor people,” Richard says. According to analysis by Philip Inman, Hunt could also save £600m on next year’s triple lock pension by changing the calculation and excluding bonuses. It’s all to play for … Everyone is seeing this statement through the lens of an upcoming election. This is one of the last opportunities to set up an economic plan before voters go to the polls, so if Hunt does not make any big swings, it likely means that he is saving his biggest announcements for the spring budget, which hints at an election late in 2024. After the failure of one of the government’s flagship policies in the supreme court last week, Hunt will be trying to strike a tone that shows stability and leadership: “It’s going to be about growing the economy, encouraging more people to work and encouraging businesses to invest in the UK,” Richard says. Lets see if it pays off. | 