Will this Spring Budget have a summer sequel?

05 March 2024

With the chancellor having limited fiscal headroom, it seems unlikely that he will be able to go as far as he would like in cutting taxes in this week’s Spring Budget. However, with the recent UK recession, falling inflation, the predicted reduction in interest rates and competition from the looming general election, will the summer bring more than just warm weather? There could also be more fiscal headroom and a special pre-election budget filled with promises of future tax cuts, that also seek to constrain any of their opposition’s spending plans.

Some may suggest that the current political landscape is similar to 1997 when polls suggested John Major’s Conservative government would be overturned for a Labour majority. With current general election polls predicting that Starmer is headed for a landslide victory, we look at what tax policies the chancellor could focus on, if he were to call an emergency fiscal event later in the year, in a last-ditch attempt to win voters. Are we likely to see a re-do of the punchy promises made by Major in his 1997 manifesto, or could Hunt go even further? 

This will clearly depend on the level of fiscal headroom, with Hunt hinting he wants to “show a path” to lower taxes in a responsible way. However, if history is due to repeat itself, we could expect tax cuts in the following areas: 

  • Income tax reductions – As a wide sweeping policy that would impact all taxpayers, could Hunt look to reduce the current basic rate of income tax to 18% or 19%? This seems to be a favoured policy of the prime minister who previously pledged to reduce the basic rate of income tax to 16%. It could well be a favourite with the court of public opinion but has the challenge of being considered an inflationary measure and is expensive. 
  • Capital gains and inheritance tax – The Conservative party policy has historically been to reduce the burden of capital gains tax and inheritance tax as and when it was prudent to do so. Given the semi-recent speculation that Hunt was considering scrapping inheritance tax, it would not come as a huge surprise if further inheritance tax giveaways were on the cards. Scrapping it entirely ahead of an election wouldn’t be credible, being politically and practically challenging. A more realistic option would be an inflationary increase in the nil rate band and residence nil rate band to ensure more families are not dragged into the inheritance tax net through rising house prices. 
  • Small companies rate of corporation tax – In his 1997 manifesto, Major promised to reduce this rate of tax in line with personal income tax rates. However, given the small profits rate of corporation tax is currently already at 19%, we believe it is unlikely that Hunt will reduce this any further. If policies in a further fiscal event remain focused on individuals, an ambition to cut this rate and the main rate of corporation tax over the next parliament could well feature in a Conservative election manifesto.

Whilst Hunt may look to sway voters with future tax cuts, it is important to remember that if Labour is successful at the general election, Starmer’s government will review and propose their own tax policies. Whilst a newly elected government may be mindful of the reputational impact of reversing any proposed tax cuts, difficult choices may need to be made if such policies are not aligned with their political agenda. The temptation of spending any surplus funds ahead of an election may nevertheless prove too tempting for the chancellor, potentially leaving the cupboard largely bare for an incoming government.

Beth Barker
Associate director
AUTHOR
Beth Barker
Associate director
AUTHOR