Mr Hunt said he would only cut taxes in a “responsible way”; Photo: Stefan Rousseau/PA Wire
Jeremy Hunt has shelved plans to cut income tax by 2p in next month's Budget as it emerged the economy had entered recession.
The Chancellor was considering cutting the basic rate of income tax from 20 to 18 percent. As an alternative, he was also considering cutting staff's National Insurance contributions by two percentage points.
However, on Thursday the Office for National Statistics announced that the economy contracted by 0.3 percent in the final three months of 2023.
The ONS chief economist said unemployment in the UK contributed to weaker growth than in other countries. . 9.25 million people are classified as economically inactive.
New forecasts showing high costs of servicing the national debt mean Hunt has less cash left than expected. The Telegraph understands that he therefore considered both steps out of reach for now.
Tightening public finances mean deeper-than-expected spending cuts are now being considered for the years following the general election.
A Treasury source told The Telegraph: “The world has changed. Everything you thought was going to happen [in the budget] may not happen now.”
It was the second quarter in a row of negative growth, which meant the UK had entered a technical recession, undermining Rishi Sunak's promise. growing the economy is one of five promises he made at the start of 2023.
Mel Stride, the work and pensions secretary, has warned that high unemployment is one of the reasons for the recession.
Writing in The Telegraph, Mr Stride says: «The shadow of economic inactivity — people neither working nor looking for it — continues to loom over our country.»
He adds: «I am deeply concerned that 2 8 million people are now ill, missing out on the financial, social and health benefits we know work brings and denying the engine of growth, our fantastic British businesses, the workforce they need.
According to the ONS, 9.25 million people aged 16 to 64 are neither working nor looking for work.
Grant Fitzner, chief economist at the ONS, also warned that economic inactivity was a major factor holding back growth. Britain remains the only G7 country not yet back to pre-pandemic employment levels.
Tory MPs were counting on significant tax cuts to revive the party's political fortunes. But the chancellor hinted at a more cautious tax approach in an interview on Thursday.
Downing Street will also find out on Friday if, as insiders have predicted for weeks, the Conservatives lose the by-elections in Wellingborough and Kingswood. The double defeat will raise new questions about President Sunak's electability.
Mr Hunt told Sky News: «I believe that if you look around the world, economies like the US and Canada that have lower taxes, especially lower business taxes, tend to grow faster.»
“But I would only cut taxes in a responsible way and certainly would not do anything that would contribute to inflation, just as we are starting to make some progress in reducing inflation.”
p>Official figures show Britain is suffering the worst fall in living standards in history.
The ONS said output per capita fell sharply at the end of last year, meaning the economy had failed to grow since the start of 2022 when adjusted for population growth.
This is the longest period of falling or stagnant levels life since then. records began in 1955.
On Thursday, Lord Rose, chairman of Asda, called for help to help more economically inactive people get back to work.
He said: “We need to get some of our local workforce back to work. It's crazy that we now have 9.2 million people who are economically inactive. 2.8 million of them say they are unable to work. Well, if that's true, then I sympathize, but I can't believe they're all unfit for work. We need to put in place some kind of system that says, “Please get back to work.”
News that the scale of the tax cuts being considered in the 6 March Budget is now smaller than just a few weeks ago has drawn criticism from some Conservative MPs.
Sir Jacob Rees-Mogg, former business secretary , and Sir John Redwood, the former trade secretary, have made fresh calls for big tax cuts to kick-start economic growth.
Sir Jacob said: “A recession means tax cuts are more necessary to jumpstart the economy. Even the late Alistair Darling [former Labor Chancellor] knew this when he cut VAT during the global financial crisis.»
Sir John said: «They have to do something really big to boost the economy.» I'm going again. It needs to be done smartly, but it can be done smartly.”
Rachel Reeves, Labour's shadow chancellor, called a press conference and declared the recession a «Rishi recession», noting that the economy is smaller now than when the Prime Minister -the minister took office in October 2022.
She said voters will be criticized repeatedly. when asked by the Labor Party: “Are you and your family feeling better after 14 years of Conservative government?” ahead of the general election expected in the autumn.
Mr Sunak and Mr Hunt are determined to announce on tax cuts in the Budget, with Labor still leading the Tories by around 20 percentage points as the election approaches.
But the amount of money they have to play with, through the so-called fiscal reserve (the money left after the national debt falls in five years), has shrunk in recent months.
After the Autumn Statement, the budget reserve stood at 13 billion pounds. It then doubled to around £26 billion at the end of the year, according to economic estimates.
Mr Hunt was given the latest forecasts by the Office for Budget Responsibility (OBR) on Wednesday evening, which Treasury insiders said had a much smaller fiscal headroom figure.
That's because the cost of servicing the public debt has risen and Markets are now predicting that overall interest rates and inflation will fall more slowly than expected at the start of the year.
How much this has reduced the fiscal headroom in the latest round of OBR forecasts is unclear, as figures close to Mr Hunt not based on specific details.
Economic forecasts suggest he is back to that figure. last autumn it was £13 billion.
Long-term sick pay stunts the engine of growth. Read more
Treasury analysis shows that cutting the basic rate of income tax by 2p would cost £13 billion, and cutting staff national insurance by 2p would cost £9 billion.
And then… and others are currently considered unavailable. , with Treasury data suggesting billions of pounds must be held in fiscal reserves to keep markets calm.
Economic forecasts could still improve between now and the Budget. The OBR is expected to provide at least three more sets of figures.
Other desired tax measures such as changing the point at which child benefits are taken away from families or agreeing to boost the property market. , are considered less likely.
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