British Treasury Chief Jeremy Hunt headed to Parliament on Wednesday to announce tax cuts for millions of workers, a move his Conservative Party hopes can turn the political dial ahead of a general election in the coming year.
Even though the British economy has hit one definition of recession and public finances are stretched, Hunt is under pressure from his colleagues to use his annual budget statement to cut taxes.
With poll after poll showing the Conservatives losing heavily to the main opposition Labour Party in a general election, the government hopes putting more money in people's pockets during a cost-of-living crisis would boost the Conservative Party’s dire ratings.
The election has to take place by January 2025 but could come as soon as May. Hunt's boss, Prime Minister Rishi Sunak, will decide when the election will take place as their party tries to retain control of government, which they have held since 2010.
Hunt is set to tell Parliament that the British economy withstood the coronavirus pandemic and a sharp spike in energy prices following Russia's invasion of Ukraine, which sent inflation soaring and prompted the Bank of England to raise interest rates aggressively.
"Of course, interest rates remain high as we bring down inflation," he plans to say. "But because of the progress we’ve made, because we are delivering on the prime minister’s economic priorities, we can now help families with permanent cuts in taxation."
Hunt, who had a pre-budget audience with King Charles III at Buckingham Palace on Tuesday, is set to announce a cut in national insurance — a tax that 27 million employees pay — by 2 percentage points, to 8%. If that materializes, it will follow his decision to cut the rate by the same amount in November.
There's also speculation that Hunt may decide to cut the basic rate of income tax by 1 percentage point. That would benefit retirees and savers, too — but would be hugely expensive.
Whatever cuts emerge will be paid for by keeping a lid on spending for already cash-starved public services as well as a series of tax increases, potentially on business class airfares, vapes and a higher levy charged to oil and gas producers. There also has been speculation that he may abolish "non-domiciled" tax status, which allows some wealthy individuals to avoid paying U.K. taxes.
Sunak has previously indicated that the election will most likely be in the second half of this year. However, Sunak has not ruled it out this spring, and Wednesday's tax-cutting budget could act as a launchpad for that.
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Sunak and Hunt have restored a measure of economic stability after the short-lived premiership of Liz Truss, which foundered after a series of unfunded tax cuts roiled financial markets and sent borrowing costs surging.
But U.K. households are struggling under the worst cost-of-living crisis in decades. And economists warn that the tax burden will remain near record levels regardless of what the budget delivers as the government recoups the hundreds of billions of pounds that it spent during the pandemic and the energy price shock.
Adam Corlett, principal economist at the Resolution Foundation think tank, said there were "huge questions" about the need for tax cuts this year, given the outlook for public spending and the need to reduce our national debt.
"But, while this is going to be a tax-cutting election year, it is sandwiched between significant past and future tax rises, with the budget likely to only add to the number of tax increases coming in after the election," he said.
