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Jeremy Hunt will on Wednesday put a £9bn permanent tax break for business at the heart of his Autumn Statement, as the UK chancellor attempts to jolt Britain’s sluggish economy back to life.
Facing forecasts that Britain’s economy will flatline in 2024, an expected election year, Hunt will also announce cuts to national insurance, scores of supply-side reforms and measures to get the sick back to work.
Hunt’s flagship reform to boost Britain’s growth rate will be the permanent extension of “full expensing”, government insiders told the Financial Times.
The scheme, which was due to expire in 2026, allows a company to immediately deduct all of its spending on IT equipment, plant or machinery from taxable profits. Extending it was a crucial demand of business groups.
Officials claimed Hunt’s permanent extension would give the UK one of the world’s most generous capital allowance regimes. One said the move would be the “biggest business tax cut in modern British history”.
The independent Office for Budget Responsibility in March said the temporary version of the £9bn-a-year full expensing policy would boost business investment by as much as 3 per cent a year during its initial three-year period.
An expected boom in tax receipts, caused in part by the government’s policy of freezing tax thresholds at a time of high inflation and rising wages, should help to give Hunt more fiscal “headroom” for tax cuts — as much as £25bn, according to some economists.
Government insiders said they expected Hunt to announce cuts to national insurance, which is a tax on earnings from employment, to incentivise work and to prove the Conservatives are serious about cutting personal taxes.
Prime Minister Rishi Sunak has also said he wants to cut the 20p basic rate of income tax. Hunt could indicate that he expects the cut to go ahead before the next election, one Downing Street insider said.
The Resolution Foundation estimates that a 1p cut to national insurance contributions paid by employees and the self-employed would benefit 28mn people and cost the exchequer £5bn a year. Such a cut would take the national insurance rate down from 12 per cent to 11 per cent and 9 per cent to 8 per cent, respectively.
A 1p cut in the basic rate of income tax would cost £7bn a year, according to the foundation. Neither approach would on its own offset the £10bn increase in personal taxes the think-tank has estimated will result from tax thresholds being frozen next year, rather than rising in line with inflation.
Hunt will on Wednesday be presented with official forecasts that are expected to show a sharp downgrade to growth projections for 2024, the likely year for the next UK general election.
The OBR in March forecast 1.8 per cent growth for 2024. Economists expect a downgrade to closer to the Bank of England’s forecasts, which point to zero growth in 2024.
Andrew Bailey, BoE governor, struck a gloomy note on the eve of the Autumn Statement as he warned that despite slowing growth, financial markets were underestimating the persistence of UK inflation, which stood at 4.6 per cent in October.
Interest rates will have to stay high for an extended period, he warned on Tuesday, pushing back against investors who are betting that the BoE will make its first interest rate cut from 5.25 per cent in June next year as part of two or three reductions in 2024.
“We are concerned about the potential persistence of inflation as we go through the remainder of the journey down to 2 per cent,” the BoE’s inflation target, Bailey told the House of Commons Treasury committee.
Hunt and Sunak are under pressure from Tory MPs to deliver a new upbeat economic strategy and reverse the party’s dismal opinion poll ratings.
The chancellor will announce supply-side reforms including streamlined planning rules, support for fast-growing industries, pensions reforms and the simplification of individual savings accounts to boost saving.
Economists believe Hunt’s headroom against his main fiscal rule — cutting debt as a share of national income in the fifth year of the forecast — could rise from £6.5bn in March to at least £25bn.
On Tuesday Hunt announced an increase in the national living wage from £10.42 to £11.44.
Ministers also expect him to increase working age benefits in line with September’s inflation figure of 6.7 per cent, the norm, rather than using October’s lower figure.