Being chancellor of the exchequer is not always a noble art but Jeremy Hunt is acting rather nobly at the moment, and no, he hasn’t briefed me to write that.
With his own political future in doubt — a swing a fraction of the size of those in last week’s by-elections would mean he would lose his Surrey seat in the next general election — he is resisting pressure from other beleaguered Tory MPs to announce tax cuts in his autumn statement on November 22.
Whether or not it is his last act as chancellor, which the Westminster rumour mill has been debating, he seems determined to stand firm.
He has repeatedly ruled out tax cuts in the autumn, warning that, “difficult decisions” lie ahead. You may say that there is an inevitable “he would say that wouldn’t he?” aspect of this.
All chancellors play down expectations ahead of fiscal events. I think, however, that in this case it is genuine.
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Hunt means it when he says that the priority is getting inflation down, and that this will bring more benefits than pulling tax rabbits out of the hat that the country cannot afford.
Should the Tories lose the next election, as polls suggest, he does not want to be responsible for the “there’s no money left” letter to his successor.
There are two things to be said about this. One is that, after the fiscal disaster of a year ago, nobody should need telling that this is a time when history should not repeat itself. The fact that this is a lesson which appears to have been lost on many is more than a little depressing. Not only that, but it would be the height of economic illiteracy to, for example, cut the basic rate of income tax while at the same time increasing income tax sharply with the long freeze on income tax and national insurance allowances and thresholds.
That, of course, was another feature of the mini-budget 12 months ago. There is a lot of what you might call painting by numbers in the debate over tax cuts.
Some of those numbers were produced by the Office for National Statistics a few days ago. They showed that public sector net borrowing — the budget deficit — was £14.3 billion last month, the sixth highest September on record, and £81.7 billion in the first six months of the current fiscal year. This was, however, £19.8 billion lower than predicted by another office, the Office for Budget Responsibility (OBR), in March. Therefore, and this is where the painting by numbers comes in from some Tory MPs and supporters, doesn’t the chancellor have roughly £20 billion to play with in tax cuts?
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No, and hang on a second. Borrowing so far this year is also more than £15 billion higher than in the corresponding period of 2022-23, when it was on its way to a full-year out-turn of £128 billion, 5 per cent of gross domestic product.
That is a lot of red ink and while there will not be an exact repeat — there should not be a need for a re-run of last winter’s energy price support — the public finances are still a long way from fixed.
An undershoot of the OBR forecast is better than an overshoot, but all it tells us is that the public finances are in a slightly less terrible state than thought. There is no green light here for tax reductions.
Hunt knows that and — though he can expect a volley from the small minority of economists who still support Liz Truss, who failed abjectly as prime minister in record time — so does Rishi Sunak.
They will find themselves up against the argument that the spirit of Arthur Laffer (of Laffer curve fame) applies to tax cuts, and that they will mainly pay for themselves. It is not true, and Sunak, in his Mais lecture in London last year when he was chancellor, put it well.
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“I am disheartened when I hear the flippant claim that ‘tax cuts always pay for themselves’,” he said. “They do not. Cutting tax sustainably requires hard work, prioritisation, and the willingness to make difficult and often unpopular arguments elsewhere. And it is hard to cut taxes at a time when demands on the state are growing.”
He must be quite disheartened now because there is lot of such talk around, particularly on his own back benches. He is also under intense pressure, which has increased following last week’s by-election defeats.
The “Rishi relaunch”, so far consisting of a delay in the net zero timetable and the decision to scrap the northern leg of HS2, appears to have gone about as well as Coca-Cola’s “New Coke” launch in the 1980s.
He is being told that the only way to rescue the Tories from electoral disaster is to offer voters the red meat of tax cuts. Most of the advocates of this approach, it should be said, do not detail the spending reductions needed to pay for them.
Hunt is sticking to his guns, and I hope that Sunak is too. The Tories’ best hope, in the time the chancellor and prime minister have left to them, and I hope it is at least a while yet, is to convince voters that the nonsense and instability of the Johnson and Truss premierships is ancient history and that they have demonstrated stability.
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Labour, out of office for well over a decade, has yet to do so, and may fail, they will argue.
It is not the best “retail offer” ever, and it probably will not work. But it has to be better than hastily cobbled together and unconvincing tax cuts, at a time when the tax burden continues to go up.
Such cuts would in the end be nothing more than a scorched earth strategy, and would make an even bigger mess of an already over-complicated tax system.
Let us hope that the chancellor can stand his ground.
David Smith is Economics Editor of The Sunday Times
david.smith@sunday-times.co.uk
