Unraveling the Possible Solutions to Tax Cuts: Debunking the Myth of Impossibility

Last month, inflation experienced a decline to 6.7%, a significant drop from the peak of 11.1% in October of the previous year. While this high inflation provided additional tax revenue for the Chancellor, it also resulted in increased government spending on the national debt, which currently stands at £2.5 trillion.

In this regard, the Office for National Statistics reported that the Exchequer borrowed £11.6 billion in the same month, an increase of £3.5 billion compared to the corresponding month in 2022, as spending rose at a faster pace than revenues.

Throughout the current financial year, the total amount borrowed by the government has reached £69.6 billion, exceeding the figure borrowed during the same period last year by £19.3 billion. Nevertheless, as the amount borrowed is lower than predicted by the Office for Budget Responsibility (OBR), there is hope that the Chancellor may have a bit more flexibility.

However, Carl Emmerson, deputy director of the Institute for Fiscal Studies (IFS), advised caution and suggested that only small or temporary tax cuts might be justifiable given the strain on public finances.

Emmerson clarified by stating that the improvements in public finances, compared to the OBR’s forecasts, “can’t really be used to pay for a permanent tax cut of any size.” He added that even if borrowing falls below OBR’s predictions, the figures are still likely to be worse than anticipated back in 2022.

According to Mr. Emmerson, the Chancellor’s target of reducing debt is achievable only by a narrow margin.

A Significant Challenge

Paul Johnson, director of the IFS, highlighted that although borrowing levels are expected to decrease, the accumulated national debt resulting from the pandemic remains a significant challenge.

During an interview with BBC Radio 4, Johnson explained that both the Labour and Conservative parties are committed to reducing the national debt, which is currently at its highest level since the 1960s. However, he stressed that this reduction would prove challenging.

Johnson stated, “It’s hard for several reasons – one is that we’re paying an awful lot of debt interest payments, more than we have in generations. We’re already increasing taxes, and that’s not enough to offset this increase in debt. And the third issue is that this is happening despite the fact that the plans for spending set out in the Budget are really very tight.”

Philip Shaw, an economist at Investec, believes that it should ultimately be possible to make room for some tax cuts.

Shaw said, “Mr. Hunt will be keen to reinforce his fiscal credibility at November’s Autumn Statement and refrain from loosening the purse strings. However, unless we see a material turn for the worse in the direction of public borrowing, we sense that some tax cuts will be forthcoming in the Budget next spring, even if the Chancellor has to reach deep down the back of the sofa to find the cash to be able to do so.”