- Written by Vishara Sri Patma
- business reporter
image source, Getty Images
Prime Minister Jeremy Hunt at Davos
Prime Minister Jeremy Hunt has signaled strongly that he wants to cut taxes in the spring budget.
Hunt told the BBC that countries with lower taxes have more “dynamic, fast-growing economies”.
In his Autumn Statement, the Prime Minister announced a 2% cut in national insurance for workers and tax cuts for businesses.
If inflation falls this year and interest rates fall with it, Mr. Hunt may have room for further tax cuts.
Mr Hunt was speaking during a visit to the World Economic Forum in Davos, Switzerland, where he expressed his desire to attract further investment to the UK.
He said “the direction of travel” showed that faster-growing economies, North America and Asia, tended to have lower taxes than the UK.
He added: “I fundamentally believe that a low-tax economy is more dynamic, more competitive and generates more money for public services like the NHS.”
He gave no further details on the size of any potential future tax cuts, as the government awaits an assessment from the Office for Budget Responsibility (OBR).
However, it is widely expected that the Chancellor will focus on income tax in his Budget on March 6.
The tax threshold has now remained at the same level for more than two years, pushing households into higher income tax brackets and pushing the overall tax burden to its highest level in decades.
Normally, the tax base increases with inflation, i.e. the rate of increase in store prices, but from 2021 onwards it remains unchanged and will remain frozen until 2028.
Tax cuts depend on inflation
Inflation is expected to decline as the year progresses, but it unexpectedly rose to 4% in December from 3.9% in November.
The Prime Minister said he was “confident” that inflation would continue to fall and that prices were “heading in the right direction”.
“I think it’s on a downward trend, and I think it’s going to continue to decline,” he told reporters Thursday.
Lower inflation would not only reduce the government’s huge debt interest bill, but also help pave the way for faster interest rate cuts by the Bank of England.
The Bank of England has kept interest rates unchanged at 5.25% for the past three meetings in a bid to curb inflation, but is expected to lower them by the end of the year.
The reduction in debt interest payments alone could give the Chancellor more power to cut taxes by around £15bn.
However, the UK is still on the brink of recession, with official growth figures showing the UK economy contracted between July and September. A recession is usually defined as when GDP declines two consecutive times in three months or quarters.
Mr Hunt insisted it was “too early to know how much tax cuts will be possible”, but said the rapid fall in inflation was a sign that the UK’s economic outlook was improving.