How the chancellor could spend it

Jeremy Hunt could have more money to play with in tomorrow’s autumn statement after a reassessment of the outlook for the public finances from the independent Office for Budget Responsibility (OBR). One economic consultancy says higher growth and lower debt bills could hand the chancellor as much as £25bn in extra firepower, up from £6.5bn in the spring. We look at some of his options, and how expensive they might be. Cuts to income tax and/or national insurance Rishi Sunak appears to be pushing hard for personal tax cuts, saying the halving of inflation is a turning point for the economy and an opportunity to cut the tax burden on middle-income families. The chancellor has spent the past two weeks cautioning against any expectation of tax cuts, however, arguing that it would put cash in consumers’ pockets, putting pressure on shop prices when the priority is to bring down inflation. Hunt could signal a cut in the basic rate from 20p to 19p from next April. But that would cost the exchequer about £6.9bn a year. The loss of income tax would also mount each year as incomes increased and 19p instead of 20p in every pound was taken as tax. The OBR will judge the move does little to boost growth and probably forces the Bank of England to maintain interest rates at a higher level for longer. Cost to the Treasury £££ Raise income tax thresholds All thresholds – the zero rate, 20p rate, 40p rate and 45p rate – are currently frozen until 2028. Hunt could raise the threshold at which taxpayers start paying tax, which was frozen in the 2022 budget at £12,570. This would allow those on low incomes to keep more of their income. If the other thresholds remained the same, the cost would be limited, handing back about £3bn to £5bn of a total the OBR said could hit £25bn from freezing all thresholds until 2028. The Institute for Fiscal Studies said last month that what started out as a four-year freeze to income tax thresholds to raise an estimated £8bn had become a six-year freeze – and one that now applies to NICs thresholds as well as income tax – “which we estimate would raise £52bn in 2027–28”. Cost to the Treasury: ££££ Cut inheritance tax The IFS has estimated that receipts worth £7bn are paid by just 4% of all estates and this will rise within 10 years to £15bn and affect 12% of all those who inherit assets from their relatives. While there are calls for wholesale reform to make the tax fairer, not least from the IFS, the chancellor is under pressure to reduce the burden immediately. The threshold for paying the 40% tax is £325,000, rising to a potential £500,000 if the asset passed on is property. This allowance can be combined by spouses, giving a potential threshold of £1m. Under current plans, the thresholds will remain frozen until April 2028. Hunt could raise the threshold, taking many middle-income families in the south-east with homes worth more than £1m out of inheritance tax, or cut the rate from 40% to 20%, which the consultancy Capital Economics said would cost of £3.6bn. Cost to the Treasury ££ Extend 100% allowances for investment Full expensing of capital investment, which allows firms to offset spending on plant and machinery against profits, was expected to cost about £10bn a year by the OBR. Capital Economics judges that the cost of a oneyear extension would be £9.1bn, while other estimates, including a calculation by the IFS, put the cost at nearer £1bn to £3bn. Business groups would welcome it being extended or made permanent. And the OBR would most likely raise its forecast for growth, giving the Treasury some much-needed extra income to balance out the overall cost. Cost to the Treasury ££££ Cut stamp duty When Rishi Sunak was chancellor, he reacted to a pandemic downturn in the housing market by reducing stamp duty. Transactions doubled and prices jumped by 20% over the following two years. The housing market has entered another trough in response to high interest rates, which have priced out first-time buyers, despite help in Kwasi Kwarteng’s mini-budget in September last year; the ill-fated then-chancellor increased the threshold from £125,000 to £250,000, and from £300,000 to £425,000 for first-time buyers. A year ago, Hunt introduced a “sunset clause” for this measure, but he could extend the measure at a cost Capital Economics said would be £1.6bn. Cost to the Treasury £ Restrict inflation rise for welfare and pension payments By convention, the chancellor should raise benefits next April in line with September’s inflation rate, which was 6.7%. Pensions can also go up in line with earnings, if that is higher. However, hints from No 10 and No 11 suggest the increases will be trimmed – in the case of workingage benefits, quite severely. One move could be to align working-age benefit increases with the October inflation rate of 4.6%. Any such attempt at “cherrypicking” was criticised last week by the Royal Statistical Society and anti-poverty charities, which said it would harm low-income families. It could save Hunt £2bn annually, but cost the average working family as much as £500 a year in lost income. Hunt could also save £600m on next year’s triple-lock pension uprating by raising it in line with the 7.7% increase in regular pay in July rather than the total pay increase of 8.5%, which was swelled by public sector bonuses. Boost to the Treasury £££ Public services There is a long list of public services in need of extra support from the Treasury. Local councils are going bust and wrestling with huge bills for housing from those made homeless by high rents and claims for asylum. The NHS needs more cash to pay doctors, to reduce a backlog of operations and to repair crumbling buildings. It also needs investment to revamp and integrate ageing IT systems. Ministry of Defence officials say more funds are needed to keep pace with the demands of the Ukraine war and other conflicts, while Michael Gove’s housing budget has only limited means to meet a target of building 300,000 homes a year. Cost to the Treasury £££££ Phillip Inman