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Chancellor Jeremy Hunt has vowed that he will not do anything that undermines “the battle against inflation” in his upcoming Autumn Statement, as politicians on the right of his party demand steeper tax cuts.
Hunt said on Friday that the UK economy had “definitely turned a corner” following data released this week that showed price growth had dropped to 4.6 per cent in October, but he warned that inflation remained “the biggest single risk to the economy”.
The chancellor is looking to offer larger tax incentives for corporate investment coupled with reductions in inheritance tax (IHT) that would woo Tory voters.
He is expected to have more fiscal room for manoeuvre against his budget rule than expected in March, as forecasters including Capital Economics put the figure at more than £20bn. JPMorgan has estimated the headroom at £26bn, well ahead of the £6.5bn predicted in March by the Office for Budget Responsibility.
But two days after the government met its pledge to halve inflation, he remains wary of acceding to calls for big-ticket tax reductions that could inflame price growth.
“We are not going to do anything on tax that compromises the battle against inflation — we have made very important progress on that,” Hunt told a group of reporters in Sheffield on Friday. “The best way we can bring down the tax burden is to grow the economy, so that will be our primary focus.”
The chancellor is under intense pressure from within his party to offer pre-election giveaways as the Conservatives try to narrow Labour’s 20-point opinion poll lead.
But after implementing tough measures, including £30bn of spending cuts and £25bn of tax rises, in the wake of former prime minister Liz Truss’s disastrous “mini” Budget last year, the chancellor is wary of shaking market confidence.
John Redwood, a former Tory cabinet minister, said he believed Hunt now has “some room for manoeuvre for tax cuts” and could create more wriggle room by pushing for a harder productivity drive in the civil service.
Hunt’s allies said any decision on whether to cut IHT would not be made until the chancellor had had time to pore over new fiscal projections from the Office for Budget Responsibility, the fiscal watchdog. They were due to be handed to him late on Friday evening.
The chancellor has been considering cuts to the headline rate of inheritance tax or changes to thresholds for weeks, but could still delay the decision until the March Budget.
Speaking at ITM Power, a hydrogen equipment manufacturer in Sheffield, he announced the government would be providing £4.5bn in new funding between 2025 and 2030 for UK industrial sectors.
More than £2bn of this will go to the automotive industry, and nearly £1bn for the aerospace sector, which is intended in large part to fund the supply chain for low-emission vehicles.
Asked whether he was trying to compete with funding provided to manufacturing companies in the US, Hunt said he was “not going to indulge in a global race on subsidies” but added that providing targeted support to industries was needed so as not to cede ground to other countries.
But Jonathan Reynolds, Labour shadow business secretary, questioned why the money would not be made available for another two years. “After nine different growth plans by the Tories, it is no wonder we have the lowest business investment in the G7,” he said.
Hunt said that encouraging business investment would be one of the big priorities of the autumn statement because “in the end that’s how we’ll improve productivity”. He indicated an openness to extending the government’s flagship tax break scheme for businesses, also known as “full expensing”.
“We recognise that having competitive business taxes is an important way to grow the economy.”
Hunt also signalled plans to compensate households for electricity infrastructure built near homes as the National Grid seeks rapid expansion to deal with surging low-carbon generation on the path to net zero. The government wants to offer households near the new infrastructure discounts of up to £1,000 a year off their energy bills.
Faced with badly strained public service funding, Hunt’s Autumn Statement will contain a drive to push up public sector productivity. The chancellor suggested he wanted to see a 1 per cent improvement in productivity across the public sector as a way of saving costs.
Last month, he vowed to save £1bn by imposing a recruitment freeze across the civil service and reducing headcount to pre-pandemic levels. He has also talked up AI and improved digitisation in improving efficiency.
Additional reporting from Peter Foster in London