Jeremy Hunt shelves 2p income tax cut

Mr Hunt said he would only cut taxes ‘in a way that was responsible’ – Stefan Rousseau/PA Wire

Jeremy Hunt has shelved plans for a 2p cut to income tax at next month’s Budget as it was revealed the economy has entered a recession.

The Chancellor had been considering reducing the basic rate of income tax from 20 to 18 per cent. He had also considered reducing National Insurance employee contributions by two percentage points as an alternative.

However, the Office for National Statistics announced on Thursday that the economy had contracted 0.3 per cent in the last three months of 2023.

The ONS’s chief economist said that worklessness in Britain had contributed to weaker growth than other countries. There are 9.25 million people classed as economically inactive.

New forecasts showing the high costs of servicing government debt mean that Mr Hunt has less money to spend than expected. The Telegraph understands he has therefore deemed both moves unaffordable for now.

The tightening public finances mean that deeper-than-expected spending cuts are also now being considered for the years after the general election.

A Treasury source told The Telegraph: “The world has changed. Everything you thought was going to happen [at the Budget] may not now happen.”

It was the second quarter in a row of negative growth, which meant the UK entered a technical recession, undermining Rishi Sunak’s promise to grow the economy, one of five pledges he made at the beginning of 2023.

Mel Stride, the Work and Pensions Secretary, has warned that high levels of worklessness are part of the reason for the recession.

Writing in The Telegraph Mr Stride says: “The shadow of economic inactivity – people not in work nor looking for it – continues to hang over our nation”.

He adds: “I find it deeply concerning that 2.8 million people are now off sick – missing out on the financial, social and health benefits we know work brings, and denying the engine of growth, our fantastic British businesses, the labour they need.”

According to the ONS, 9.25 million people aged between 16 and 64 are not working nor looking for work.

Grant Fitzner, the ONS’s chief economist, also warned that economic inactivity was a major factor holding back growth. The UK remains the only G7 nation yet to return to pre-pandemic employment levels.

Conservative MPs had been banking on major tax cuts to reinvigorate the party’s political fortunes. But the Chancellor hinted at a more cautious tax approach in interviews on Thursday.

Downing Street will also learn on Friday if, as predicted for weeks by insiders, the Conservatives lose the by-elections in Wellingborough and Kingswood. A double defeat would raise fresh questions about electability under Mr Sunak.

Mr Hunt told Sky News: “I do believe that if you look around the world, that the economies like the United States and Canada which have lighter taxes, particularly lighter taxes on business, tend to grow faster.

“But I would only cut taxes in a way that was responsible and I certainly wouldn’t do anything that fuelled inflation just when we are starting to have some success in bringing down inflation.”

The official figures showed Britain is suffering the longest hit to living standards on record.

The ONS said output per person fell sharply at the end of last year, meaning the economy has failed to grow since early 2022 after accounting for population growth.

This is the longest period of falling or stagnating living standards since records began in 1955.

On Thursday Lord Rose, the chairman of Asda, called for more of the economically inactive to be helped back into work.

He said: “We need to get some of our own indigenous workforce back into work. It’s madness that we’ve got these 9.2 million people who are economically inactive now. 2.8 million of them claim they’re not fit to work. Well, if that’s true, I’m sympathetic, but I can’t believe they’re all unfit to work. We’ve got to put some system in place which says, look, please get back to work.”

News that the scale of tax cuts being considered for the March 6 Budget is now smaller than just a few weeks ago met with criticism from some Conservative MPs.

Sir Jacob Rees-Mogg, the former business secretary, and Sir John Redwood, the former trade secretary, issued new calls for sizable tax cuts to kick-start economic growth.

Sir Jacob said: “A recession means tax cuts are more needed to give the economy a boost. Even the late Alistair Darling [the former Labour chancellor] knew this when he cut VAT during the global financial crisis.”

Sir John said: “They’ve got to go for something really significant to get the economy going again. It’s got to be done prudently but it can be done prudently.”

Rachel Reeves, Labour’s shadow chancellor, called a press conference and declared the slump “Rishi’s recession”, noting the economy was smaller now then when the Prime Minister took office in October 2022.

She said voters would repeatedly be asked by Labour “do you and your family feel better off after 14 years of Conservative Government?” in the run-up to the general election, which is expected in the autumn.

Mr Sunak and Mr Hunt are determined to announce tax cuts at the Budget, given Labour still leads the Tories by around 20 percentage points as the election looms closer.

But the amount of money they have to play with via the so-called fiscal headroom – the money left over after making sure that government debt is falling five years from now – has reduced in recent months.

After the Autumn Statement, the fiscal headroom was £13 billion. It then broadly doubled to around £26 billion at the turn of the year, according to economic estimates.

On Wednesday night, Mr Hunt was handed the latest forecasts by the Office for Budget Responsibility (OBR) which had the fiscal headroom figure much smaller, according to Treasury insiders.

That is because the cost of servicing government debt has risen, with markets now predicting overall interest rates and inflation will fall less quickly than was expected at the start of the year.

Quite how much that has shrunk the fiscal headroom in the latest round of OBR forecasts is unclear, with figures close to Mr Hunt not being drawn on the specifics.

Economic forecasts suggest it is once again back around the figure last autumn, which was £13 billion.

Mel Stride

Long-term sickness benefits are stalling the engine of growth

Read more

Treasury analysis shows a 2p cut in the basic rate of income tax would cost £13 billion while a 2p cut in employees’ National Insurance would cost £9 billion.

Both are for now deemed unaffordable, given Treasury figures judge that billions of pounds in headroom must be kept in the reserve at the Budget to keep markets calm.

The economic forecasts could yet improve between now and the Budget. At least three more sets of figures are expected to be handed over by the OBR.

Other desired tax moves, such as changing the point at which child benefit payments are withdrawn from families or accepting to boost the property market, are seen as less likely.

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