Tax and spending cuts will backfire, economists warn Jeremy Hunt | Jeremy Hunt

Leading economists warn today that Jeremy Hunt will “cost the country dear” if he gambles on pre-election cuts to tax and spending in this week’s budget.

Two former advisers to the Treasury, backed by other economists, said that instead of decisions aimed at “sabotaging prospects for the next government”, the chancellor should focus on the long-term national interest with measures to spur investment and growth.

In a statement to the Observer, Dimitri Zenghelis, a former head of economic forecasting at the Treasury, and Anna Valero, a former member of the chancellor’s economic advisory council, said the country needed to break out of a cycle of short-termism.

“Tax cuts to stimulate a pre-­election consumer spending spree is the last thing the British economy needs and will cost us all dear,” they said.

“For over a decade, economic short-termism and low and volatile investment has saddled the country with macroeconomic instability, stagnant living standards and one of the poorest productivity performances among major economies.”

Warning against using the budget for political reasons and to satisfy demands from Tory MPs to slash spending and cut tax, they added: “Instead of sabotaging prospects for the next government, the chancellor should announce a package of measures to drive UK innovation and competitiveness, spur productivity and unlock new, intelligent and sustainable forms of growth.”

On Saturday there were signs of tension between No 10 and the Treasury over tax and spend decisions, with Rishi Sunak said to be pushing harder for tax reductions.

Government sources said a move to reduce a planned rise in public spending for 2025 from 0.9% of GDP to 0.75% (which would raise £5bn) was “still live”, as was the ­prospect of more tax cuts. A further reduction in national insurance, in addition to the 2% announced last autumn, or in the basic rate of income tax have both been under consideration. Another option being considered is scaling back the benefits “non-doms” receive from the tax system.

Such a move – which the Tory government has previously claimed would drive wealth out of the country – would be seen as nakedly political because Labour has promised to use the £2bn it would raise from scrapping non-dom tax status to fund its flagship policy of breakfast clubs in all state primary schools, as well as more dental appointments.

Labour sources have indicated that if the government does scale back tax breaks for non-doms, Keir Starmer’s party may not be able to fulfil its policy commitments should it come to power.

Last week, the Office for Budget Responsibility informed the Treasury that the amount of “fiscal headroom” it has – around £13bn to fund any giveaways – had fallen over recent days due to the state of the national finances, lessening Hunt’s room for manoeuvre.

Of that £13bn, around £5bn is expected to be accounted for by freezing fuel duty again while a further 1% cut in national insurance would cost another £4.5bn.

Ben Zaranko, senior research economist at the Institute for Fiscal Studies, said the chancellor was “sailing very close to the wind” if he was to meet his rule of having debt falling as a proportion of GDP within five years.

“If the government was serious about getting debt falling, it would aim to meet this target with a greater degree of ‘headroom’ rather than seek to spend every last penny,” he said.

“The chancellor faces a clear temptation to ‘pay for’ immediate tax cuts with unspecified post-election cuts to public services, thereby leaving the difficult business of allocating those spending cuts to the next government. He should resist that temptation. If he wants to cut taxes, he should spell out where the spending cuts will fall.”

David Gauke, a former Tory Treasury minister, said: “If they are going to bet the house on lower taxes, that will make them look less fiscally credible. That is a political risk as well as being an economic risk.

“They may think they are just passing on problems to a future government but it will also damage the Conservatives’ wider economic reputation if they go down that route.”

Gauke added that Hunt’s reputation was at stake. “This is probably his last big job and his last budget. If I was Jeremy Hunt my priority would be ensuring that my reputation and the Conservatives’ reputation for good economic management is enhanced not diminished, rather than trying to gamble that a big tax cut would be transformational, which I don’t think it would be. It certainly wasn’t last autumn.”

On Saturday as budget talks continued between No 10 and 11 Downing Street, the Treasury announced £800m of investment by 2029 in a series of measures across the police, NHS and justice system to improve productivity in the public sector.

To help get police officers back to frontline tasks, over £230m will fund the rollout of time-saving technology including automated redaction of personal information such as name badges in shoplifting incidents, irrelevant faces from body-worn cameras and number plates from video evidence.

Hunt said: “We shouldn’t fall into the trap of thinking more spending buys us better public services. There is too much waste in the system and we want public servants to get back to doing what matters most: teaching our children, keeping us safe and treating us when we’re sick.”

Zenghelis, now at Cambridge University, and Valero, from the London School of Economics, blamed what they described as Hunt’s “arbitrary debt rules” for “stunting UK growth”. They said that higher borrowing would be more than justified so long as the money was spent on vital infrastructure that would boost growth.

Hunt is expected to tell parliament on Wednesday that he has constructed a budget that will bring down the ratio of debt to annual national income, or gross domestic product (GDP), in the final year of his five-year forecast.

Under the terms of the rule, the debt to GDP ratio is allowed to rise for four years, as long as it falls in the fifth year of projections for the economy and the public finances provided by the Office for Budget Responsibility – the Treasury’s independent forecasting unit.

UK GDP is about £2.1tn and the cumulative debt position is about the same, leaving a debt to GDP ratio of about 96%.

Zenghelis and Valero said: “The time has come to reform the fiscal rules and banish the myth of fiscal headroom. Debt is not a burden if it finances resilient, sustainable and productive investment.

“The stop-start nature of the UK’s investment means there are significant underspends from year to year and lots of money is wasted. This is a contributing factor to falling living standards.”