British finance minister Jeremy Hunt surprised everyone with big tax cuts on Wednesday (Nov 22). The populist move may help the ruling Conservative Party win some favour among British voters, but it may create problems for the next government, irrespective of which party wins the upcoming elections.
Conservatives cheered Hunt in the parliament when he announced lowering social security contributions for employees by two percentage points. This was bigger than expected. A smaller cut has been awarded for self-employed workers.
The latest measure alongwith another taken earlier this year is going to be worth about 20 billion pounds ($25 billion)a year by 2028-29 tax year. Earlier this year, Hunt made incentives for business investment permanent.
That represented Britain’s biggest giveaway package since 1988, apart from the huge tax cut plans last year of former Prime Minister Liz Truss which hammered the bond market and were quickly dropped, the Resolution Foundation think tank said as reported by Reuters.
The big tax increases announced by Hunt and UK Prime Minister Rishi Sunak last year dwarf Wednesday’s tax cuts.
Currently, the Labour Party has about 20-point lead over the Conservatives in opinion polls. An election is likely next year.
However, if it indeed forms the next government, it will likely have hard time adhering to public spending that may result from Hunt’s Autumn Statement plan.
“The giveaways announced today are funded by handing whoever wins the next election implausibly large spending cuts,” Torsten Bell, chief executive of the Resolution Foundation, said as quoted by Reuters.
Since the financial crisis of 2007-08, many of public services in Britain have had to withstand deep funding cuts when inflation is considered.
It is likely that Hunt will come under pressure from his own party for more tax cuts in a budget expected in March. It is likely to be a pre-election budget.
Paul Johnson, head of the Institute for Fiscal Studies, told Reuters that the cost of tax cuts along with that of servicing Britain’s 2.6 trillion-pound debt may possibly undermine Hunt’s aim of boosting growth.
“There’s a material risk that those plans prove undeliverable and today’s tax cuts will not prove to be sustainable,” Johnson said.
(With inputs from agencies)