Jeremy Hunt has left a poisoned pill for his successor at the Treasury after the next UK general election, with economists warning that the £20bn tax cuts the chancellor pledged in this week’s Autumn Statement implied deep cuts to public services in the future.
The multibillion-pound giveaway on personal and business taxes was achieved by deciding not to protect public services against the rising costs of inflation, Richard Hughes, head of the independent Office for Budget Responsibility, said on Thursday.
Paul Johnson, director of the Institute for Fiscal Studies, said Hunt or his successor would have “one heck of a headache” in handling the post-election squeeze on public services pencilled in by the chancellor.
These warnings are unlikely to dampen the enthusiasm of the ruling Conservatives for returning more money to taxpayers ahead of the next election, which is expected late next year. “Conservatives cut taxes,” said an online party ad. “It’s just what we do.”
Prime Minister Rishi Sunak wants to run an election campaign which stresses that when a future Tory government has “fiscal headroom”, its priority will be cutting the country’s tax burden, which is still rising.
“I could have done a lot of things with the headroom I have,” Hunt said on Thursday about the Autumn Statement, in which he cut the main rate of national insurance by 2p and gave an £11bn-a-year tax break to businesses. “But as a Conservative, I believe lower taxes are how we grow the economy.”
He said that if he had instead put £20bn into public services, he would not have secured his objective of making the economy more competitive. “That means less money for the NHS, police and schools in the long run,” he told the BBC.
The decision won widespread approval from business groups and the rightwing press. But the effect is to leave large parts of the public sector facing austerity, with little indication of how Hunt — or his Labour successor — might implement cuts.
Hughes said Hunt had given himself the money for the tax cuts by “not changing the level of public spending in his Autumn Statement” and allowing the “real spending power” of departments to fall by about £20bn because the inflation forecasts that budgets were based on had turned out to be too optimistic.
He said the OBR was hindered in producing credible forecasts by the fact that the Treasury did not have to give any detail of its spending plans beyond the end of next year. “Beyond that it’s just a big question mark,” he said.
Johnson said it was “questionable, if not plain implausible” that the next government would stick to Hunt’s plans as they implied cuts in day-to-day spending and investment in some public services on a similar scale to the post-2010 election austerity drive by then-chancellor George Osborne.
For Labour, which has a 20-point lead in the polls over the Conservatives, the prospect of inheriting such a bleak public spending backdrop is a big problem.
The opposition party has indicated it will avoid the political trap being set for it by voting for Hunt’s £20bn tax cuts, thereby avoiding Tory accusations Labour was a party of high taxes.
But it leaves shadow chancellor Rachel Reeves facing questions about how she would repair Britain’s public services without raising taxes if her party won the next election.
For now, she insists “growing the economy” alongside tax raids aimed at the wealthiest in society, targeting private equity executives, non-domiciled residents and private schools, would allow her to achieve that goal.
But it is not clear whether that approach will hold through an election campaign when Sunak will inevitably portray Labour as the party that would raise taxes for public spending, while the Tory instinct is for tax-cutting.
Former Labour chancellor Gordon Brown, who later became prime minister, has already written the playbook for dealing with such potential traps by promising to stick to Conservatives’ spending plans.
Ahead of Labour’s 1997 election victory, Brown said he would adhere to the eye-wateringly tight public spending plans set down by Tory chancellor Ken Clarke for two years.
To the surprise of many, Labour stuck to that promise, even though Clarke later admitted he never had any intention of sticking to the plans himself.
Carys Roberts, executive director at the Institute for Public Policy Research think-tank, said the Autumn Statement offered “tax cuts today” while ignoring the difficult decisions facing whoever is chancellor beyond 2025. “It’s not credible that these cuts [to public services] will be enacted in full,” she said.
One former Tory cabinet minister said: “I’d expect Labour to put up taxes on the other side of the election. Reeves will do what all incoming chancellors do: they’ll say they’ve had a look at the books and they are even worse than they thought.”
Andrew Harrop, general secretary of the Fabian Society, said: “Whichever party wins the next election will need to increase spending on essential services to reflect inflation, pay pressures and the rising needs of our ageing population”
He added: “The chancellor has pretended this is not true.”
Nevertheless, Hunt is expected to cut taxes again before the next election with party officials suggesting the chancellor will use the Spring Budget to start delivering Sunak’s promise of cuts to the 20p basic rate of income tax.
As for the timing of the election, Hunt’s decision to bring forward the national insurance tax cut to January has left Sunak with the option of a spring election should the Tories’ dire opinion poll ratings sharply recover.