Jeremy Hunt accused of playing his tax rules

Chancellor Jeremy Hunt was accused on Thursday of playing his fiscal rules in a way that suggests the public finances may be in worse shape than the figures in his budget.

Harriett Baldwin, the Conservative chair of the House of Commons finance committee, said Mr Hunt was engaging in “fuel tax fiction” and “business investment fiction” to flatter the public finances in the official forecasts accompanying the Budget on Wednesday.

Her complaints were echoed by Paul Johnson, director of the Institute for Fiscal Studies, a think tank, and Richard Hughes, chairman of the Office for Budget Responsibility, the independent fiscal watchdog. The Ministry of Finance declined to comment.

Hunt’s key fiscal rule is that underlying public sector net debt must fall as a share of gross domestic product by the fifth year of OBR forecasts in 2027-28.

In his budget, Hunt achieved this with just £6.5bn. “The overall outlook for public finances remains difficult,” Johnson said.

Hughes, referring to Hunt’s tax rules, said “governments are finding new ways to game those rules”.

Harriett Baldwin said Hunt engaged in ‘fuel tax fiction’ and ‘business investment allowance fiction’ to flatter the public finances © Charlie Bibby/FT

“The new game is to announce an aspiration, but then say ‘I’ll only get there when my resources allow.’ Well, your resources don’t allow [it], so why are you advertising this thing?” he added.

Part of the way Hunt met his key fiscal rule was to tell the OBR the government would raise petrol and diesel taxes in line with inflation every year and scrap his proposed new capital grants for businesses costing around £9bn. £ per year after three years.

But in the Budget, Hunt followed the practice of every Conservative chancellor since 2011 by freezing fuel duty for 2023-24, saying that because inflation was high “it is not the right time to raise fuel duty with inflation”.

He also extended a temporary reduction of 5p per liter, costing him a total of £4.9bn in the next financial year. However, in the coming years, OBR forecasts assume that fuel duty will rise in line with inflation.

The forecasts also assume the expiry of investment incentives, under which companies can write off 100 per cent of their capital expenditure against taxable profits by the end of 2025-2026, although Hunt said he would like to make the arrangements permanent “as soon as we can do it responsibly”.

And Hunt said the government would like to increase defense spending to 2.5 per cent of gross domestic product “as fiscal and economic circumstances permit”.

At his Autumn Statement in November, Hunt set out tight spending plans after the next election in 2025-26, which many economists believe will not be sufficient to sustainably run public services.

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Johnson said Hunt had met his fiscal rules and balanced the current budget by relying on “a combination of austere spending plans, imaginary future increases in fuel duty and a tax windfall from reluctantly undoing his corporation tax change”.

“This is not a very sensible way to be governed by such rules,” he added.

Baldwin said the “fictions” in the budget about fuel taxes and tax breaks for business investment simply weren’t going to happen.

“I honestly don’t think so . . . just before a general election next year, the chancellor will allow fuel duty to rise as predicted in the OBR’s economic outlook,” she added at an event organized by the Resolution Foundation, another think tank.

“The same will probably apply to these three years [capital allowances plan].”

Baldwin said that forecasts of the public finances and government policy were increasingly driven by the fiscal rules and exaggerated the strength of the public finances.

Hughes said there were various potential government measures “that are not in our forecast that could easily wipe it out [£6.5bn of fiscal] headroom tomorrow”.

UK fuel tax revenue line chart (£bn) showing the fuel tax assumptions make a big difference to the tax arithmetic

He added that Hunt’s fuel tax policy, his temporary tax breaks for business investment and the government’s target to spend 2.5 percent of GDP on defense were not affordable if the government also wanted to meet its fiscal rules.

“When you combine those things, it stalls [Hunt’s] steers by a country mile,” Hughes said.

The OBR published a memo on Wednesday assessing Hunt’s tax rules on the basis that the government decides to continue freezing fuel duties.

It shows that Hunt would only meet its debt rule with £2.8bn. fiscal surplus to spare in 2027-28 compared with £6.5bn in the primary OBR forecast.

In a number of scenarios contained in the note, the OBR also said the rule would be broken and debt would continue to rise if labor force participation was 500,000 lower than expected or if interest rates were 1 per cent higher than forecast.

Rises in financial market rates since the OBR finalized its pre-Budget forecast would have wiped out all of Hunt’s £6.5bn of headroom against his key fiscal rule.

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