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Jeremy Hunt ‘drops plan to slash income tax by 2p’ in the Budget as the UK slips into recession and halves Chancellor’s ‘headroom’ for cuts next month


Jeremy Hunt last night binned long-signalled plans to cut income tax by 2p in his Budget next month, as the UK lurched into recession. 

The Chancellor is said to have backtracked on moves to reduce the basic rate from 20 per cent to 18 per cent in a pre-election move to boost economic growth.

He is under pressure to get the economy back on track with his spring budget after the UK slipped into a recession and the ‘headroom’ for cuts halved. 

Grim figures showed the economy shrank by a worse-than-expected 0.3 per cent in the final three months of 2023.

Britain met the technical definition of a recession – two straight quarters of contraction – because output also fell 0.1 per cent between July and September.

That news came after the Treasury was handed official estimates that showed just £13billion of wiggle room for tax cuts, down from £24billion at the start of the year.

The Chancellor (pictured) was under pressure to get the economy back on track with his spring budget after the UK slipped into a recession and the 'headroom' for cuts halved

The Chancellor (pictured) was under pressure to get the economy back on track with his spring budget after the UK slipped into a recession and the ‘headroom’ for cuts halved

While experts said the recession would be short and shallow ¿ with growth expected in the first quarter of this year ¿ Mr Hunt (pictured) is under pressure to take urgent action, with the country labelled a 'stagnation nation'

While experts said the recession would be short and shallow – with growth expected in the first quarter of this year – Mr Hunt (pictured) is under pressure to take urgent action, with the country labelled a ‘stagnation nation’

According to the Telegraph Mr Hunt is moving away from cutting personal taxes or National Insurance and may instead try to cut public spending.

A source told the paper: ‘The world has changed. Everything you thought was going to happen may not now happen.’ 

If confirmed in the Budget next month it may create yet another battlefront in the ongoing Tory civil war over the economy. 

While experts said the recession would be short and shallow – with growth expected in the first quarter of this year – Mr Hunt is under pressure to take urgent action, with the country labelled a ‘stagnation nation’.

The estimates from the Office for Budget Responsibility have left him looking at a public spending squeeze in order to find an extra £5-6billion and provide some relief to families and businesses in his crucial pre-election budget on March 6, less than three weeks away.

Struggling households already face the biggest tax burden since the Second World War, while borrowing costs have reached a 16-year high.

Norman Lamont, a peer and Tory former chancellor, said he thought there was room for tax cuts.

‘There is probably some headroom that has been created by very strong growth in tax revenues, particularly as a result of the freezing of the tax thresholds for such a long period,’ he told the BBC.

‘Looking longer term though, any tax cuts have to be matched by tight control on public spending, probably financed by reductions in public spending.

‘People ought to be realistic about this. We have an almost perfect storm. We are coming through it, I think there is light at the end of the tunnel now and we just need to hold our nerve.’

Tory former business secretary Sir Jacob Rees-Mogg said: ‘The economy clearly needs a boost and this should come in the form of lower interest rates and tax cuts. 

To pay for this the state needs to do less and encourage the record number of economically inactive people back into work.’

There were also calls for the Bank of England to make borrowing cheaper.

‘The case for early rate cuts is now even stronger,’ said Julian Jessop of the Institute of Economics Affairs think tank. ‘It is important that the Chancellor avoids doing anything that might reignite inflation and encourage the Bank to keep rates higher for longer.

‘But there is room for some well-targeted tax cuts that would both support demand and boost the productive potential of the economy.’

A Treasury (pictured above) source cautioned that the space for tax cuts at the budget would be more limited than at the autumn statement, which came with a 2p cut in National Insurance

A Treasury (pictured above) source cautioned that the space for tax cuts at the budget would be more limited than at the autumn statement, which came with a 2p cut in National Insurance

Mr Hunt yesterday hinted that tax cuts were on the way, saying there was light at the end of the tunnel and countries with lighter taxes tended to grow faster.

But a Treasury source cautioned that the space for tax cuts at the budget would be more limited than at the autumn statement, which came with a 2p cut in National Insurance.

‘We will cut taxes only if it is affordable to do so,’ the source insisted. ‘But it is looking increasingly unlikely that we will be able to match the scale of the autumn statement.’

The Office for National Statistics put part of the blame for recession on those who have dropped out of the jobs market since the pandemic.

Growth is being curtailed by the 9.3million who are ‘economically inactive’ – neither in work or looking for work – with a record 2.8million on long-term sickness.

And the five million working days lost to strikes since June 2022 were a further drag on the economy.

Britain is the only G7 economy yet to return to pre-pandemic employment levels. Grant Fitzner, chief economist at the ONS, said: ‘If more people were in work, consuming, producing, we would have higher GDP numbers.

‘So the fact that economic activity fell significantly post-pandemic and has only partly recovered is one of the factors underpinning weaker growth, and obviously that would also underpin weaker consumer spending, given there are fewer people in employment and spending money.’

And the detail of the statistics suggested that only the very high levels of immigration have been keeping the economy afloat.

After the ONS adjusted for new population estimates, GDP per person was down 0.6 per cent in Q4 – and has not gone up since the start of 2022. That is thought to be the longest hit to living standards since records began in 1955.

While GDP grew marginally across the whole of 2023 – by 0.1 per cent – per head it was down by 0.7 per cent. At the beginning of the year, economists predicted Mr Hunt would have around £20billion of headroom for tax cuts.

Now he is considering freeing up an additional £6billion by slashing projected spending rises to 0.75 per cent – down from 1 per cent.

And Roger Barker of the Institute of Directors said: 'Business confidence has been slightly improving in recent weeks. It is important that this progress is sustained by the policy decisions of the Chancellor and the Bank of England (pictured)'

And Roger Barker of the Institute of Directors said: ‘Business confidence has been slightly improving in recent weeks. It is important that this progress is sustained by the policy decisions of the Chancellor and the Bank of England (pictured)’

The economy declined by a worse-than-expected 0.3 per cent in the quarter from October to December

The economy declined by a worse-than-expected 0.3 per cent in the quarter from October to December

Businesses are also calling for a pro-growth budget, including restoring VAT-free shopping for international tourists.

Martin McTague of the Federation of Small Businesses said ministers must ‘put this period of stagnation and shrinkage behind us once and for all’.

Muniya Barua, of the campaign group BusinessLDN, said: ‘Restoring VAT-free shopping on goods for tourists will deliver a win-win for business and the Exchequer.’ 

And Roger Barker of the Institute of Directors said: ‘Business confidence has been slightly improving in recent weeks. It is important that this progress is sustained by the policy decisions of the Chancellor and the Bank of England.’

Annual growth for last year was the weakest since the financial crisis in 2009 – excluding the start of the pandemic in 2020.

The European Commission yesterday said that eurozone growth will be slower than expected this year due to high inflation and interest rates.

‘The UK’s recession is not unique,’ said Karim Fatehi of the London Chamber of Commerce and Industry. 

‘Much of the global economy is witnessing similar stagnation in productivity, manufacturing, and economic growth, but that does not mean our Government should delay making tangible policy changes needed to incentivise growth and investment.’

Ruth Gregory of Capital Economics said the recession was ‘as mild as they come’ and already nearing an end. And the National Institute of Economic and Social Research forecasts the economy will grow by 0.2 per cent by April.

Thomas Pugh, UK economist at audit firm RSM, said: ‘By the summer inflation should be back at around 2 per cent, interest rates will likely be falling and consumers may well be enjoying some significant tax cuts. 

‘This will kickstart a consumer-spending led recovery that should see the economy finally return to growth.’



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