Tax and spending cuts will backfire, economists
warn Jeremy Hunt
Former Treasury aides say the chancellor is courting
danger on UK debt and that fiscal rules must go
Toby Helm
and Phillip Inman
Sat 2 Mar
2024 15.00 EST
Leading
economists warn today that Jeremy Hunt will “cost the country dear” if he
gambles on pre-election cuts to tax and spending in this week’s budget.
Two former
advisers to the Treasury, backed by other economists, said that instead of
decisions aimed at “sabotaging prospects for the next government”, the
chancellor should focus on the long-term national interest with measures to
spur investment and growth.
In a
statement to the Observer, Dimitri Zenghelis, a former head of economic
forecasting at the Treasury, and Anna Valero, a former member of the
chancellor’s economic advisory council, said the country needed to break out of
a cycle of short-termism.
“Tax cuts
to stimulate a pre-election consumer spending spree is the last thing the
British economy needs and will cost us all dear,” they said.
“For over a
decade, economic short-termism and low and volatile investment has saddled the
country with macroeconomic instability, stagnant living standards and one of
the poorest productivity performances among major economies.”
Warning
against using the budget for political reasons and to satisfy demands from Tory
MPs to slash spending and cut tax, they added: “Instead of sabotaging prospects
for the next government, the chancellor should announce a package of measures
to drive UK innovation and competitiveness, spur productivity and unlock new,
intelligent and sustainable forms of growth.”
On Saturday
there were signs of tension between No 10 and the Treasury over tax and spend
decisions, with Rishi Sunak said to be pushing harder for tax reductions.
Government
sources said a move to reduce a planned rise in public spending for 2025 from
0.9% of GDP to 0.75% (which would raise £5bn) was “still live”, as was the
prospect of more tax cuts. A further reduction in national insurance, in
addition to the 2% announced last autumn, or in the basic rate of income tax
have both been under consideration. Another option being considered is scaling
back the benefits “non-doms” receive from the tax system.
Such a move
– which the Tory government has previously claimed would drive wealth out of
the country – would be seen as nakedly political because Labour has promised to
use the £2bn it would raise from scrapping non-dom tax status to fund its
flagship policy of breakfast clubs in all state primary schools, as well as
more dental appointments.
Labour
sources have indicated that if the government does scale back tax breaks for
non-doms, Keir Starmer’s party may not be able to fulfil its policy commitments
should it come to power.
Last week,
the Office for Budget Responsibility informed the Treasury that the amount of
“fiscal headroom” it has – around £13bn to fund any giveaways – had fallen over
recent days due to the state of the national finances, lessening Hunt’s room
for manoeuvre.
Of that
£13bn, around £5bn is expected to be accounted for by freezing fuel duty again
while a further 1% cut in national insurance would cost another £4.5bn.
Ben
Zaranko, senior research economist at the Institute for Fiscal Studies, said
the chancellor was “sailing very close to the wind” if he was to meet his rule
of having debt falling as a proportion of GDP within five years.
“If the
government was serious about getting debt falling, it would aim to meet this
target with a greater degree of ‘headroom’ rather than seek to spend every last
penny,” he said.
“The
chancellor faces a clear temptation to ‘pay for’ immediate tax cuts with
unspecified post-election cuts to public services, thereby leaving the
difficult business of allocating those spending cuts to the next government. He
should resist that temptation. If he wants to cut taxes, he should spell out
where the spending cuts will fall.”
David
Gauke, a former Tory Treasury minister, said: “If they are going to bet the
house on lower taxes, that will make them look less fiscally credible. That is
a political risk as well as being an economic risk.
“They may
think they are just passing on problems to a future government but it will also
damage the Conservatives’ wider economic reputation if they go down that
route.”
Gauke added
that Hunt’s reputation was at stake. “This is probably his last big job and his
last budget. If I was Jeremy Hunt my priority would be ensuring that my
reputation and the Conservatives’ reputation for good economic management is
enhanced not diminished, rather than trying to gamble that a big tax cut would
be transformational, which I don’t think it would be. It certainly wasn’t last
autumn.”
On Saturday
as budget talks continued between No 10 and 11 Downing Street, the Treasury
announced £800m of investment by 2029 in a series of measures across the
police, NHS and justice system to improve productivity in the public sector.
To help get
police officers back to frontline tasks, over £230m will fund the rollout of
time-saving technology including automated redaction of personal information
such as name badges in shoplifting incidents, irrelevant faces from body-worn
cameras and number plates from video evidence.
Hunt said:
“We shouldn’t fall into the trap of thinking more spending buys us better
public services. There is too much waste in the system and we want public
servants to get back to doing what matters most: teaching our children, keeping
us safe and treating us when we’re sick.”
Zenghelis,
now at Cambridge University, and Valero, from the London School of Economics,
blamed what they described as Hunt’s “arbitrary debt rules” for “stunting UK
growth”. They said that higher borrowing would be more than justified so long
as the money was spent on vital infrastructure that would boost growth.
Hunt is
expected to tell parliament on Wednesday that he has constructed a budget that
will bring down the ratio of debt to annual national income, or gross domestic
product (GDP), in the final year of his five-year forecast.
Under the
terms of the rule, the debt to GDP ratio is allowed to rise for four years, as
long as it falls in the fifth year of projections for the economy and the
public finances provided by the Office for Budget Responsibility – the
Treasury’s independent forecasting unit.
UK GDP is
about £2.1tn and the cumulative debt position is about the same, leaving a debt
to GDP ratio of about 96%.
Zenghelis
and Valero said: “The time has come to reform the fiscal rules and banish the
myth of fiscal headroom. Debt is not a burden if it finances resilient,
sustainable and productive investment.
“The
stop-start nature of the UK’s investment means there are significant
underspends from year to year and lots of money is wasted. This is a contributing factor to falling living standards.”
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