Chancellor urged to explain how tax cuts will be paid for ahead of Budget

The Chancellor should avoid announcing tax cuts at next week’s Budget unless he can spell out how he will pay for them, the Institute for Fiscal Studies (IFS) has said.

Jeremy Hunt faces continued pressure from Conservatives to cut taxes when he delivers what is likely to be his final Budget before the next election, as the overall tax burden approaches record levels.

The IFS warned on Tuesday that current post-election spending plans already meant further cuts to unprotected public services – such as local government and the court system – which reducing taxes would only exacerbate.

The well-respected think tank said failing to set out exactly what spending cuts would be used to “pay for”, tax cuts would “lack credibility and transparency”.

Official forecasts of the Chancellor’s “headroom” against his plans to get borrowing to fall in five years’ time are understood to have moved against the Government and Treasury sources have said Mr Hunt is considering a further squeeze on public spending plans as a way to deliver tax cuts.

Martin Miklos, research economist at the IFS, said: “In November’s autumn statement, the Chancellor ignored the impacts of higher inflation on public service budgets and instead used additional tax revenues to fund eye-catching tax cuts.

“At next week’s Budget, he might be tempted to try a similar trick, this time banking the higher revenues that come from a larger population while ignoring the additional pressures that a larger population will place on the NHS, local government and other services.

“He might even be tempted to cut back provisional spending plans for the next Parliament further to create additional space for tax cuts.

“The Chancellor should resist this temptation. Until the Government is willing to provide more detail on its spending plans in a spending review, it should refrain from providing detail on tax cuts.”

In analysis published ahead of next week’s Budget, the IFS suggested the budget deficit may be around £11 billion smaller than it was forecast to be in November, but still much higher than it was forecast to be in March 2022.

The IFS also said the faster population growth projected by the ONS could boost revenues, but also meant current plans would see per-person spending rise by just 0.2% per year after the election.

Factoring in likely spending plans for the NHS, defence, schools and childcare meant other departments would see around £20bn per year in real-terms cuts by 2028-29, with another £20bn per year set to be taken out of investment spending.

Both the IFS and Office for Budget Responsibility have previously expressed scepticism that the spending cuts pencilled in for after the election will be delivered, with IFS director Paul Johnson telling reporters the Chancellor was “to some extent … gaming his own fiscal rules”.

The IFS added that if the Chancellor was determined to cut taxes, it would be better for growth to cut stamp duty on purchases of property and shares rather than cutting income tax or national insurance.