In a major speech on the economy on Monday, the prime minister said: “You can trust me when I say we can responsibly start to cut taxes.”
Boasting about the halving of inflation, something he had promised to do by the end of the year, Mr Sunak said the government could now “turn our attention to cutting tax”.
The prime minister suggested a cut to personal taxes was on the way this week by saying “we will reward work” and insisting that his government would focus on measures to “get the economy growing”.
However, as Mr Sunak comes under pressure from Tory MPs to cut personal, business and wealth taxes, the Institute for Fiscal Studies (IFS) warned that the government can only afford “a tiny tax cut” on Wednesday.
Reports at the weekend suggested that Mr Hunt was considering a shock cut to income tax. But the chancellor emphasised on Sunday that he did not want to offer a tax cut “that fuels inflation”.
Cutting national insurance is now more likely than income tax, according to The Times, with Treasury officials thought to be of the view that it would be cheaper and less inflationary.
The Independent understands that a controversial cut to inheritance tax is now off the table, pushed back until at least next year. A government source said any tax cuts announced on Wednesday would focus on supply-side measures to boost economic growth – something an inheritance tax cut, a levy on wealth, does not do.
Mr Sunak has been under huge pressure from different Tory factions to cut a range of taxes – with many of his MPs insisting the Spring Budget is too late to wait to revive party fortunes ahead of an election expected in autumn 2024.
The prime minister said he believed in cutting taxes “carefully and sustainably” as he warned against “simple, fairytale” promises. “We can’t do everything all at once,” Mr Sunak said – before outlining that reducing the tax burden was one of his five, new long-term economic goals.
The Tory leader also claimed handing over the UK economy to Labour would be “just as dangerous” as having Liz Truss in charge – recalling last year’s unfunded tax cut spree at the disastrous mini-Budget.
Mr Sunak said Sir Keir and Rachel Reeves wanted to continue the “big spending approach”, pointing to the opposition’s £28bn green business plan. He claimed there was “no way” a Labour government would be able to cut taxes.
“This makes the same economic mistake as last year’s mini-Budget – blowing tens of billions of pounds on unfunded spending is just as dangerous as blowing tens of billions of pounds on unfunded tax cuts,” Mr Sunak said.
Senior Tory John Redwood – a leading advocate for tax cuts – has backed the idea of reducing income tax. “Any tax cut is better than none,” the right-winger told The Independent.
“I would rather have the income tax [cut] than the national insurance option,” said Mr Redwood. “People resent it [income tax] more, people recognise it more, and if you’re trying to get confidence up you ought to do something people feel good about.”
Mr Sunak and Mr Hunt are also expected to squeeze benefits with a real-terms cut on Wednesday – a move set to spark outrage from charities and opposition parties.
Ministers were set to use the September figure for inflation when uprating benefits – a 6.7 per cent hike. But Mr Hunt could instead use October’s far-lower figure of 4.6 per cent. Analysis by the Resolution Foundation found that families would lose £500 a year with the lower payments.
Senior Conservative MP Stephen Hammond, deputy chair of the One Nation group of Tory moderates, warned against the squeeze on benefits.
Mr Hammond told The Independent: “We should stick to our commitments on uprating benefits. Let’s not try to say because inflation has fallen, which is great news, we can’t stick to the earlier figure committed to.”
Mr Sunak said on Monday that the welfare system is not currently “sustainable”, as the government prepares to launch a new crackdown on claimants who refuse to engage with their job centre – potentially removing payments and even dental care.
Tory MP David Jones, deputy chair of the European Research Group, urged Mr Hunt to focus on slashing “bitterly resented” inheritance tax as well as corporation tax. “He needs to stimulate growth – cutting corporation tax would be a good way of doing that – it’s been up and down like a yo-yo,” he said.
Meanwhile, Paul Johnson, director of the IFS, said the chancellor can only afford “a tiny [tax] cut here or a tiny cut there” on Wednesday.
Although Mr Hunt has been said to have enhanced fiscal “headroom” of around £25bn, the IFS director said Britain’s grim debt picture meant there was little to play with. “There’s lots of speculation that, against his rather strange target, there’s a little bit more room for manoeuvre. But that’s not real,” Mr Johnson told Times Radio.
Mr Hunt told the CBI conference on Monday that his autumn statement was “not yet finalised” so there is still time to make changes – but again hinted at personal tax cuts by saying he was “focused on growth” after the halving of inflation.
The chancellor also said he felt “a lot more positive” about Britain’s economic outlook than a year ago, and hopes the Tory government can shake off “defeatism and pessimism” in the run-up to the general election.