Prime Minister Rishi Sunak and Chancellor Jeremy Hunt have been in talks over which spending cuts and tax rises they will announce in the Autumn Statement this Thursday (17 November).
Following the disastrous “mini-Budget” introduced by Liz Truss’s administration at the end of September, the UK is preparing itself for the government to impose austerity measures of £60bn. Sunak has warned of “tough decisions”. Advance reports suggest he will adopt a 50:50 split between spending cuts and tax rises (in contrast to George Osborne’s 80:20 ratio).
What might they be?
Cuts to public spending are expected to mostly take the form of “efficiency savings” from government departments. This could mean the scaling back of some projects, Whitehall job cuts and real-terms reductions in public sector pay amid high inflation.
The Institute for Government has warned about this approach in light of the results of the austerity programme that was imposed by David Cameron’s administration: “Even in 2010, after ten years of generous spending increases,” writes the institute’s deputy chief economist, Thomas Pope, “there were few genuine ‘efficiency savings’ found. Most public services had deteriorated between 2010 and the eve of the pandemic and are performing even worse now, so it is safe to assume that any easy efficiencies were found long ago.”
Longer freeze in income tax thresholds
Sunak and Hunt are reportedly considering extending the current freeze on income tax thresholds to 2027-28. Sunak originally froze tax bands in the wake of the Covid in the 2021 Budget, when he was chancellor. The move was then expected to generate £8bn. Now, with higher inflation, the Bank of England has forecast that the extension could generate £30bn in revenue.
Labour shortages mean wages are rising in cash terms, so a freeze would push more workers into higher tax bands, meaning a cut in their take-home pay. The Centre for Economics and Business Research said this could result in three million workers paying more income tax, with 2.2 million of these being pushed into the higher rate tax band of 40 per cent.
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Reintroducing the 50p income tax rate
Hunt is said to be weighing up the reintroduction of the 50p income tax rate, a policy introduced by the last Labour government and reduced to 45p by Osborne in his 2013 Budget. Truss and Kwasi Kwarteng announced the abolition of this band in the mini-Budget before being forced to U-turn after a revolt among Tory MPs.
Hunt is also reportedly considering reducing the £150,000 threshold at which the 45p rate of tax is paid to £140,000 (at present only the top 1.5 per cent of earners pay the rate).
This move has already prompted criticism from within the party, with the former cabinet minister David Jones warning that “the Conservative position is that high taxes act as a disincentive to the entrepreneurship and aspiration we want to encourage”. Such a policy would also break the 2019 Tory manifesto promise not to raise income tax (though it should be noted that Boris Johnson already broke this commitment when he introduced the health and social care levy last year).
Freezing inheritance tax threshold
Earlier this week the Financial Times reported that Hunt is planning to raise an extra £1bn by freezing the current inheritance tax threshold for an extra two years – until April 2028.
This means that more people will expect to pay inheritance tax, which is 40 per cent of a person’s estate above a tax-free allowance of £325,000 in assets when they die. Maintaining the freeze will generate more revenue, especially as inflated house prices push up the value of estates.
This move could go down badly with many Tories. Some have dubbed the plans a “slap in the face to Conservative voters” and claimed they amounted to a “cruel and unusual punishment being enacted upon the homeowners of Middle England”.
Raising benefits and pensions in line with inflation
Sunak is eager to demonstrate “compassionate” conservatism amid the wider cuts. The government could therefore offer support for the poor and vulnerable by raising benefits and the state pension in line with inflation. Although he did not confirm the plans, the Work and Pensions Secretary, Mel Stride, told Times Radio that the statement would prioritise vulnerable groups.
A higher windfall tax
The Chancellor is reportedly considering raising the windfall tax on oil and gas companies from 25 per cent to 30 per cent and extending it to 2028. This follows the first “energy profits levy”, which was introduced by Sunak back in May.
Labour MPs have regularly challenged the government on its position regarding the windfall tax. At Prime Minister’s Questions on 9 November, Starmer suggested Sunak was too “weak” to impose a substantial tax on energy companies.
The tax is popular with the public but some Conservatives worry it could discourage long-term investment. It was reportedly a source of conflict between Sunak and Johnson in government.
Freezing defence spending
Reports have also emerged that Hunt is considering freezing defence spending at 2 per cent of GDP. This could ignite political tensions as Ben Wallace, the Defence Secretary, has reportedly threatened to resign if the government breaks its pledge to increase spending to 3 per cent by 2030 in the face of new international threats.
But defence is vulnerable as the 3 per cent commitment alone is forecast to cost the UK an extra £157bn over the next eight years.
The Chancellor will announce his plans to the House of Commons at around 12.30pm this Thursday. Nothing is confirmed yet but whatever happens, there are no easy options for Sunak and Hunt.
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