Liz Truss is expected to join Conservative party calls for tax cuts ahead of Jeremy Hunt’s March Budget, despite new forecasts warning of slower growth and lower tax revenues than expected.
Hunt, the chancellor, and prime minister Rishi Sunak are warning MPs that tax cuts are not planned in the Budget and that the priority is tackling inflation and bringing the public finances under control.
But Truss, the former prime minister, and other Tory rightwingers argue that tax cuts now will help to generate growth — in spite of the implosion of the Truss government’s debt-funded £45bn tax cutting mini-Budget last September.
“Liz believes that the policy was right but that she didn’t get the political backing she needed,” a colleague of Truss said. “She is still convinced we need to get out of this box of low growth.”
An ally of Truss said he expected the former prime minister to break months of political silence ahead of Hunt’s Budget.
The insistence of the Tory right that tax cuts are needed in the Budget exasperates Sunak and Hunt, whose strategy is to stabilise the economy and bring inflation under control.
Hunt, who will set out a plan for economic growth in a speech on Friday, has told Tory MPs he hoped to offer pre-election tax cuts in the Budget of spring 2024, ahead of an expected autumn poll.
“People seem to have very short memories,” said an ally of Hunt, referring to Kwasi Kwarteng’s statement last September. Sunak said last week that people were “not idiots” and could see why taxes could not be cut immediately.
But Iain Duncan Smith, another former Conservative leader, told the Financial Times that Kwarteng’s tax cutting Budget failed for several reasons and was not an excuse not to cut taxes now from their postwar high.
He said markets were already febrile when Kwarteng announced the £45bn of cuts and the then chancellor compounded the problem with an excessively generous energy support package and an undermining of institutions.
“We are choking ourselves off,” Duncan Smith said. “If you want to cut the economy, you have to ease off the tax burden on individuals and companies.
“Politically, you can’t wait until next year for a tax reduction because that would look cynical.” Duncan Smith added that he believed Hunt would find space for tax cuts and was managing expectations.
Conservative-supporting newspapers, including the Daily Mail and Daily Telegraph, are also clamouring for immediate tax cuts and many Tory MPs agree. “What’s the alternative — drive the economy off a cliff?” asked one.
With the government now determined to listen to the independent Office for Budget Responsibility, insiders confirmed that the fiscal watchdog had sent the first round of its economic forecast to the Treasury last week.
First reported in The Times, these show a small downgrade in medium-term growth forecasts, which would lead to lower tax revenues and could reduce the room for manoeuvre on taxes in the run-up to a 2024 election.
The FT has learnt that the first iteration of the forecast included a 0.2 percentage point reduction in the forecast growth rate in 2027-28. The OBR now thinks the size of the UK economy will be 0.5 per cent smaller in that year than stated in the Autumn Statement forecast.
If these changes are confirmed by the OBR in the March Budget, they would represent a small revision compared with the 3 per cent downgrade the fiscal watchdog forecast last year.
Treasury officials caution that lower wholesale gas prices are unlikely to lead to a large war chest for tax cuts.
With interest rate projections still high, the annual cost of government debt will not have fallen far. Officials are also expecting lower revenues from oil and gas taxation as well as windfall taxes because profits from the North Sea fields will drop.
Internal government projections suggest that oil and gas revenues might fall more than £10bn in 2023-24 on current prices, although the hit to the public finances would be much smaller in the medium term.
Offsetting these effects, which would increase public borrowing and debt, are official figures for public finances this year that are better than expected, despite the government borrowing a record £27.4bn in December.
The OBR said on Tuesday that once timing effects and a one-off adjustment for student loans were accounted for, underlying public borrowing in 2022-23 was running £11.3bn lower than expected.
The surprisingly strong public finance figures, it said, “was broad-based across central government receipts and spending, as well as borrowing by both local authorities and public corporations”.
On Wednesday, the Office for National Statistics reported that UK producer price inflation slowed to the lowest rate in almost a year in December, as cost pressures receded.
Producer input prices — the prices paid by businesses for materials and other goods — rose by an annual rate of 16.5 per cent in December, down from 18.0 per cent in November.
Additional reporting by Valentina Romei in London