Would tax cuts benefit the UK economy?

Rishi Sunak used a somewhat low-key speech on Monday to signal the UK economy is finally on the right track and it was time to "turn our attention to tax cuts".

It follows weeks of speculation ahead of tomorrow’s Autumn Statement. With inflation finally falling and official figures showing the government borrowing £16.9 billion less than expected this year and enjoying higher tax revenues, commentators expect Chancellor Jeremy Hunt to "pull out a couple of rabbits, while saving a bit of cash in the locker to splash in a pre-election giveaway in the spring", reported Politico.

Having previously declared personal tax cuts to be "virtually impossible", the chancellor and PM appear ready to perform a dramatic U-turn; one driven as much by political expediency as economic responsibility.

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What the papers said

Both The Times and The Sun suggest Hunt is preparing to deliver his budget bunny in the form of a cut to National Insurance (NI). Other mooted giveaways, such as a reduction in stamp duty, inheritance tax and income tax, are likely to be delayed until the spring. This means "workers' wallets are likely finally to get a long-overdue break", said The Sun. 

Hunt is also set to cut taxes for businesses by extending so-called "full expensing" – a tax relief allowing businesses to offset their investments against corporate tax – seen as a priority for the chancellor to boost the economy.

While "the overwhelming focus of the cuts will be aimed at helping businesses to invest", said BBC economics editor Faisal Islam, a tax cut that helps "make work pay" and "so improves the supply of workers, helping relieve a key constraint on growth" will be announced. And NI "seems to fit the bill", he said.

The arguments for both business and household tax cuts have been "well rehearsed for decades, albeit with inconsistent supporting evidence", said Mohamed El-Erian in the Financial Times (FT). They are said to stimulate both short and longer term growth "through increased consumer spending and corporate investment", said El-Erian, president of Queens’ College, Cambridge, and an adviser to Allianz and Gramercy. They also encourage "efficient resource allocations throughout the economy" and attract a higher level of foreign investment.

With a looming general election and the Conservatives badly trailing Labour in the polls, there is a political incentive to cut taxes, too. In doing so "the government appears to have finally decided to try to win the next general election rather than face a 1997-style wipeout", said Camilla Tominey in The Telegraph.

This is effectively "buying back popularity with tax cuts", argued Will Hutton in The Observer. It is also "breathtakingly wrong", he said, specifically citing mooted cuts to inheritance tax, which will "do little for growth – instead choking off a much-needed source of revenue and inflating inequality".

The Conservatives are keen to create clear dividing lines with Labour and regain their reputation as the party of low tax. However, shaping the budget around tax cuts would "not only yield minimal short-term gains but also impede a necessary and already-delayed journey towards higher productivity and inclusive and more sustainable long-term growth", said El-Erian in the FT.

According to Hunt's own logic for the past year, "shot-in-the-arm tax cuts risk keeping inflation high", as more money in people's pockets can raise or maintain demand for goods and services, said Mehreen Khan, economics editor at The Times.

Paul Johnson, from the Institute for Fiscal Studies, warned i news of the danger of interest rates staying higher for longer if the Treasury stokes inflation with premature tax cuts. This would have very real consequences for homeowners, keeping mortgage rates higher, he said.

Instead, said Hutton, "every spare pound should be consecrated not to tax cuts but to raising public investment – a key trigger for increased private sector investment and, ultimately, a better future".

What next?

The "contours of the argument" set to play out this week will be the government claiming that "an economic turnaround has created space for a tax cut", said the BBC's Islam. The opposition, meanwhile, will say the PM is "jumping the gun at the behest of backbenchers and in any case only reversing one of two dozen tax rises".

In making a turnaround argument, however, it is worth waiting for what the independent Office for Budget Responsibility (OBR) says in its forecasts for the economy, with the latest predictions from the Bank of England putting overall growth for 2024 at zero.

"That's why the government's celebration of any tax cuts for millions of people this week should be taken with a pinch of salt," said Khan at The Times. "When inflation is still more than double the Bank's target, where the government gives with one hand, the [Bank's Monetary Policy Committee] will be ready to take away with the other."