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Hunt needs a big, bold tax move to benefit as many as possible

Chancellor of the Exchequer Jeremy Hunt
Jeremy Hunt has dropped ‘strong hints’ he’ll cut taxes in his next Budget on March 6 - Victoria Jones/PA Wire

“Inflation doesn’t fall in a straight line,” said Chancellor Jeremy Hunt last week. He was responding to news that the UK’s consumer price index increased 4pc during the year to December, up from 3.9pc the previous month.

This unexpected rise followed successive monthly falls in inflation since last February. It challenged the narrative that the UK’s cost of living crisis is easing, allowing interest rates to come down and pulling the economy out of the doldrums.

Downing Street was desperate for another inflation drop when the Office for National Statistics released this latest inflation data on Wednesday.

News of ongoing turmoil in the House of Commons – with the Tories seriously split over proposals to deport illegal migrants, processing asylum claims in Rwanda – needed to be countered.

But with inflation going up, it was a double whammy of woe for an increasingly beleaguered Prime Minister. Little wonder talk of Tory regicide, whispered in Parliament for months, has now burst into the open.

Food price inflation fell in December to 8pc, down from 9pc the previous month, as supermarkets vied for pre-Christmas shoppers. And transport sector costs were 1.3pc lower than in December 2022 – with petrol and diesel prices down 8.1pc and 15.5pc respectively, reflecting a 12-month drop in the price of oil.

Yet overall December inflation was pushed higher by accelerating prices for clothing and footwear, recreation and culture and, above all, alcohol and tobacco.

The combined “booze and fags” index rose an eye-watering 12.9pc, up from 10.2pc in November – partly due to government-imposed duty increases.

UK price pressures remain relatively high, with US and eurozone inflation now 3.4pc and 2.9pc respectively – with America, in particular, benefiting from cheaper energy due to fracking.

Hunt was keen to point out, though, that both the US and eurozone have experienced inflation rises over recent months. As he says, inflation really “doesn’t fall in a straight line”.

Global energy markets remain vulnerable to geopolitics, of course. A serious escalation of tensions at the mouth of the Red Sea leading to the Suez Canal, or in the Persian Gulf, would cause a nasty spike in oil and gas prices.

Some 35pc of hydrocarbons used each day pass through these global energy pinch points.

A sustained flare-up of the Russia-Ukraine conflict would also impact global markets, not just for energy, but also fertiliser and food.

Under these circumstances, UK inflation could surge anew, preventing the Bank of England from lowering interest rates from 5.25pc and reversing recent falls in commercial borrowing costs.

We could see another small inflation uptick this month, reflecting the rise in Ofgem’s energy price cap at the start of January. Yet the most likely outcome, for now, is that by early spring CPI headline inflation will be falling rapidly again – reaching the Bank of England’s 2pc target by the summer.

The Monetary Policy Committee could then implement one, two or even three interest rate cuts, ahead of a general election in October or November. That’s the hope of Downing Street strategists, with an economic “feelgood factor” the only basis upon which the Tories can meaningfully contest the next battle for the keys to No 10.

As part of the same strategy, Hunt last week dropped “strong hints” he’ll cut taxes in his next Budget on March 6. Nations with lower taxes have more “dynamic, faster growing economies”, he said. Yet his and Sunak’s policies have pushed the UK’s tax burden – the total tax take as a share of GDP – to a 70-year high.

On cue, Labour now paints itself as “the true party of low taxation”. Shadow chancellor Rachel Reeves told the swanky Davos summit that she wanted to ensure “success is celebrated” by cutting taxes for those earning more than £125,140 a year, paying the 45pc top rate of tax.

It’s ironic that, as an election approaches, Reeves now backs policies put forward by former prime minister Liz Truss in her 2022 mini-Budget, dismissed by Labour at the time and even now as “deeply irresponsible”.

The shadow chancellor is on firmer ground when she attacks the freezing of the basic (20pc) and higher rate (40pc) tax thresholds in the face of rising inflation. That’s dragging millions of low- and modestly paid workers into higher income tax bands, as allowances fail to keep pace with price rises.

These stealth taxes have been deeply damaging, not only to the dynamism of the UK economy, as incentives to work have been dented, but to the Tories’ electoral chances and broader party brand.

That’s why I reiterate the case for this Government to make a big, bold tax move that benefits as many workers as possible, not just the relatively small number of households affected by inheritance tax.

Given the sharp rise in insolvencies – from 22,129 in 2022 to 25,159 last year, a 14pc increase – last April’s sharp rise in corporation tax from 19pc to 25pc has clearly been counter-productive, driving too many businesses over the edge. It should immediately be reversed.

But the Tories’ flagship tax move should be to raise the tax-free personal allowance from £12,570 to £20,000, while keeping the basic rate at 20pc.

The freeze in the personal allowance – implemented for three years by the then chancellor Sunak in 2021, and extended by Hunt until 2028, has already cost taxpayers an additional £540 a year. For someone on just £20,000, that’s a whopping 11pc rise in their annual income tax bill.

Raising the personal allowance to this level would free up around seven million workers from paying income tax. This would be a highly progressive move, helping poorer households much more, while lifting one in five taxpayers out of tax altogether – including many receiving the basic state pension.

Ministers need to bolster growth, but in a way that’s seen to be fair. While inflation and immigration are important, it’s bold tax moves that are needed if the Tories are to compete.

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