Unlock Editor’s Digest for free
Roula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.
Jeremy Hunt will put a permanent £9bn tax break for businesses at the center of his autumn statement on Wednesday, as the chancellor seeks to revive Britain’s flagging economy.
Amid forecasts that the UK economy will stagnate in 2024, a likely election year, Hunt will also announce cuts to social security, more than 100 supply-side reforms and measures to get sick people back to work.
Hunt’s flagship reform to boost Britain’s growth rate will be the permanent extension of “full cost accounting”, government insiders told the Financial Times.
The scheme, which was due to expire in 2026, allows a company to immediately deduct all of its expenses for IT equipment, systems or machines from taxable profits. The expansion was a crucial demand from business associations.
Officials claimed Hunt’s permanent extension would give the UK one of the most generous capital grant schemes in the world. One said the move was the “biggest corporate tax cut in modern British history”.
The independent Office for Budget Responsibility said in March that the temporary version of the £9 billion a year full-cost policy would boost business investment by up to 3 percent a year during the first three-year period.
An expected boom in tax revenues, driven in part by the government’s policy of freezing tax thresholds at a time of high inflation and rising wages, is expected to help give Hunt more fiscal “room” to cut taxes – up to £25 billion, according to reports the statement of some economists.
Government insiders said they expected Hunt to announce cuts to Social Security, a tax on earned income, to incentivize work and prove the Conservatives are serious about cutting personal taxes.
Prime Minister Rishi Sunak has also said he wants to cut the basic income tax rate of 20p. Hunt may indicate that he expects the cut to come before the next election, a Downing Street insider said.
The Resolution Foundation estimates that a 1p cut in national insurance contributions paid by employees and the self-employed would benefit 28 million people and cost the exchequer £5 billion a year. Such a reduction would reduce the Social Security rate from 12 percent to 11 percent and from 9 percent to 8 percent, respectively.
A 1p cut in the property tax rate would cost £7bn a year, according to the foundation. Neither approach alone would offset the £10 billion rise in personal taxes, which the think tank estimates will come from tax thresholds being frozen next year rather than rising in line with inflation.
“The Conservatives will oppose big government, high spending and high taxes because we know that leads to less growth, not more,” Hunt will say on Wednesday. “Our plan for the British economy is working.”
But Hunt will be presented with official forecasts on Wednesday that are expected to show a significant deterioration in growth forecasts for 2024, the likely year of the next British general election.
The OBR in March forecast 1.8 percent growth for 2024. Economists expect a downgrade to move closer to the Bank of England’s forecasts, which point to zero growth in 2024.
BoE Governor Andrew Bailey made a bleak statement on the eve of the autumn statement, warning that despite slowing growth, financial markets were underestimating the UK’s ongoing inflation, which stood at 4.6 percent in October.
Interest rates must remain high for an extended period of time, he warned on Tuesday, defying investors who are betting that the BoE will make its first rate cut of 5.25 percent in a series of two or three cuts in June next year 2024 .
“We are concerned about the possible persistence of inflation as we move towards a decline to 2 percent,” Bailey told the House of Commons Finance Committee, the BoE’s inflation target.
Hunt and Sunak are under pressure from Tory MPs to deliver a new positive economic strategy and reverse the party’s dismal opinion polls.
The Chancellor will announce supply-side reforms including streamlined planning rules, support for fast-growing industries, pension reforms and simplifying individual savings accounts to encourage saving.
Economists expect Hunt’s margin over his key budget rule – cutting debt as a share of national income in the fifth year of the forecast – could rise to at least £25 billion from £6.5 billion in March.
On Tuesday, Hunt announced an increase in the national living wage from £10.42 to £11.44.
Ministers also expect him to raise working-age benefits in line with September’s inflation rate of 6.7 percent, the norm, rather than using October’s lower figure.