Autumn Statement - tax cuts, difficult decisions deferred - The Monday Briefing


In his Autumn Statement last week the UK chancellor, Jeremy Hunt, managed the seemingly impossible, cutting taxes and reducing public borrowing.

A 2% cut in employee and self-employed National Insurance Contributions and the extension of ‘full expensing’ for corporate investment are significant tax reductions.

As well as cutting taxes Mr Hunt was able to announce that public borrowing this year is running well below forecast and that the government is on course to hit its target of reducing the level of public sector debt in five years’ time.

This felt like a more positive, and significant Autumn Statement, than had been expected. Beneath the surface lie uncertain forecasts and a challenging fiscal position.

Mr Hunt’s tax cuts were funded by increased tax receipts that are a product of high inflation and a freeze in personal tax allowances. In other words, inflation has delivered a windfall gain some of which the chancellor used to cut taxes. These cuts are modest compared to the scale of the increase in the tax burden caused by previous tax increases and high inflation. If Mr Hunt had wanted to stick to the plan for tax receipts announced eight months ago, in the March budget, he would have needed to cut taxes by over £50bn last week rather than the actual reduction of about £11bn.

Inflation raises tax revenues, but it also increases public spending. Yet Mr Hunt made no allowance in the Autumn Statement for higher public spending. To deliver on the current plans, real day-to-day expenditure on courts, prisons, probation, transport and local government would need to fall by 14% in the next three years. That comes after years of cuts to these services. As the Resolution Foundation notes, “no-one who has used a British public service in the recent past will think these cuts can be delivered in the likes of the courts or local government”.

The Autumn Statement plan for public spending after the general election looks implausibly tight. That means either even deeper public sector austerity or, as has happened in the past, higher than forecast spending, more borrowing and a further easing of the rules governing debt.

Whoever is chancellor after the general election will face difficult decisions. Public expenditure, levels of taxation and debt are all at historically high levels. Interest payments on government debt and spending on benefits for sick and disabled people have soared.  Public satisfaction with the NHS has never been lower despite large increases in spending in recent years. Defence spending is rising. After years of austerity the scope for big cuts in frontline services is limited.

Balancing levels of debt, taxation and public spending will be one of the central challenges of the next parliament.