Chancellor: Tax Cuts 'Virtually Impossible' at the Moment

The UK's total public debt was £2.6 trillion at the end of August or around 98.8 percent of the UK's annual GDP.
Chancellor: Tax Cuts 'Virtually Impossible' at the Moment
Chancellor of the Exchequer Jeremy Hunt departs Downing Street, London, on Sept. 6, 2023. (Aaron Chown/PA)
Lily Zhou

There is still no headroom to cut taxes despite the fact public borrowing has been lower than expected, Chancellor of the Exchequer Jeremy Hunt said on Thursday.

Latest figures published by the Office for National Statistics (ONS) on Thursday show the UK's public borrowing between April and August was £11.4 billion lower than expected thanks to higher-than-expected tax income.

Asked if this means he can cut taxes now, the chancellor told LBC, "I really, really wish it was true, but unfortunately it just isn't."

"If you look at what we are having to pay for our long term debt, it is higher now than it was at the spring budgets," he said.

"I wish it wasn't. It makes life extremely difficult. It makes tax cuts virtually impossible. And it means that I will have another set of frankly very difficult decisions."

Mr. Hunt said inflation and interest rates will have to be brought down to reduce the cost of debt servicing, but he doesn't believe interest rates will come down in time for his autumn budget statement on Nov. 22.

In a statement emailed to The Epoch Times, John O'Connell, chief executive of the TaxPayers' Alliance, said the chancellor's remarks "won't fly with households contending with rising bills.

"Tax cuts are only 'impossible' because of an abject failure to tackle the spiralling cost of government," he said. "The chancellor must rein in out of control spending and stop expecting taxpayers to bear the burden."

The latest ONS figures show the UK's headline inflation has fallen to 6.3 percent in August, down from an 11.1 percent peak in October last year but still well above the Bank of England's (BoE) 2 percent target.
The bank on Thursday halted its two-year interest hiking spree, holding the rate at 5.25 percent on Thursday.

It's too early to know whether the BoE will resume rate hikes or begin cutting it back down.

Mr. Hunt declined to speculate on whether the rate has peaked but insisted the slowing of inflation proved that the government's plan has been working.

Public Debt Stands at £2.6 Trillion

According to the ONS, public sector net borrowing excluding public sector banks totalled £69.6 billion so far this financial year. It's £11.4 billion less than the forecast made in March by the Office for Budget Responsibility (OBR), but still £ 19.3 billion pounds more than the same period last year.

It brought the UK's total public debt to £2.6 trillion by the end of August or around 98.8 percent of the UK's annual GDP. The level was last seen in the 1960s when the UK was still recovering from the Second World War.

The ONS said the cost of debt servicing in August was £5.6 billion, £3.1 billion down from  August 2022, and £2.2 billion below the OBR’s forecast, but it's still the third highest interest payable in any August since monthly records began in April 1997, behind those of August of 2021 and 2022.

UK Debt Faces Fresh Pensions Headwind

Britain's pensions industry, Europe's biggest, is posing a new challenge to the public debt, which is funded by government bonds known as gilts.

Pension funds, along with their insurers, hold around a quarter of outstanding gilts.

With interest rates rising to the highest levels since 2008, big asset managers have turned positive on gilts, lured in by high yields and confidence that inflation is finally easing.

But investors are concerned pension funds are likely to step back from gilts just as the BoE reduces its own holdings faster and debt issuance remains high, adding pressure on British borrowing costs.

The BoE said on Thursday that it plans to sell £100 billion in bonds in the next twelve months, compared to £80 billion the year before.

Craig Inches, head of rates and cash at Royal London Asset Management, called simultaneous sales of pension funds and BoE gilt holdings "a key concern" for Britain's debt management agency.

Investors already see signs of their dwindling demand raising borrowing costs, one being a recent rise in longer-dated yields relative to shorter ones.

"Historically UK defined benefit pension schemes have been one of the material buyers of long-dated UK government bonds. We're seeing their appetite has materially diminished versus years gone by," said Owen Davies, LDI solutions manager at Schroders, citing anticipation of transfers to insurers as a key reason.

Reuters contributed to this report.