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Jeremy Hunt will on Wednesday give motorists a £5bn pre-election tax break in the Budget, as hopes rise among Tory MPs that the chancellor has mustered enough money to fund a surprise 2p income tax cut.
Hunt is expected to extend for a further one year a “temporary” 5p-a-litre fuel duty cut and again scrap an inflation-linked rise in the levy, according to government insiders. No government has raised fuel duty since 2011.
While that move would be welcomed by Conservative MPs, some believe Hunt will unveil a bigger prize in his March 6 Budget: a headline-grabbing 2p cut in the basic rate of income tax.
Such a move would cost about £14bn a year, but Hunt could just about fund it by shaving £5bn off future public spending, deploying £7bn of the sparse fiscal “headroom” allotted to him by official forecasters, and raising several billion pounds through targeted tax rises.
Hunt is expected to partly fund a personal tax cut — a reduction in national insurance rates is the other option — by cutting spending plans in the next parliament, further squeezing public services which are already under severe strain.
According to Treasury insiders, the chancellor could save £5bn by cutting plans to increase departmental spending by 1 per cent a year in real terms after 2025, reducing the pencilled-in rise to 0.75 per cent.
“All Conservatives believe the state has a moral duty to leave as much money in people’s pockets as possible,” Hunt said on Sunday. Overall tax levels are currently at their highest level for 70 years.
Hunt has also been examining a host of targeted tax rises affecting “non-doms”, oil and gas companies, airlines, holiday lets and nicotine vapes, all intended to raise several billion pounds more to fund a big personal tax cut.
“Number 10 wants to do income tax — no doubt about it,” said one person close to the Budget process. A former cabinet minister said: “I think he will find the money to do income tax.”
Hunt has previously cut personal taxes by reducing rates of national insurance, a levy charged on workers. He reduced employee national insurance rates by 2p in his Autumn Statement last November and the cut came into effect in January.
But last month the chancellor admitted to MPs that the national insurance cut had failed to lift Tory fortunes. On Monday an Ipsos poll for the Evening Standard put support for the party at a record low of just 20 per cent, the lowest since the company began its tracker poll in 1978.
Sunak in 2022 promised to cut the basic rate of income tax from 20p to 16p if he won the next election. “Polling shows it’s more popular than national insurance cuts,” said one government insider.
A Treasury veteran said: “If we want to increase taxes, we like to use national insurance because nobody understands it. Unfortunately, the same applies if you cut it.” A 2p cut in national insurance would cost about £10bn. The Treasury declined to comment.
One rightwing Conservative MP said: “An income-tax cut would be more noticeable — it resonates with voters more, it’s easier to explain. But I do get the logic behind a NICs cut — it’s a tax on jobs essentially, it’s more targeted, it makes work pay.”
Hopes among Tory MPs for a chunky reduction in income tax will hinge on the amount of “headroom” the chancellor has against his key fiscal rule, which requires the ratio of public debt to gross domestic product to be falling between the fourth and fifth year of the fiscal forecast.
After measures including tax reductions of £20bn in November, the chancellor was left with just £13bn of wiggle-room under this rule.
Hunt over the weekend said that forecasts from the Office for Budget Responsibility had “moved against us”, teeing up a tight fiscal situation as he drew up the budget.
Hunt will be reluctant to cut the headroom much below the wafer-thin £6.5bn margin he had left after last year’s Budget.