Sunak sees inflation reduction favouring tax cut(s)

20 November 2023

The Prime Minister has tweeted on X, ‘Now that inflation is halved, we can turn our attention to cutting tax’. Laura Suter, head of personal finance at AJ Bell, looks at what tax cuts he and the chancellor might consider announcing in the Autumn Statement.

“It’s the news that every taxpayer wants to hear ahead of this week’s Autumn Statement – the Prime Minister has declared that the time is now here for tax cuts. With the target of halving inflation safely in the bag, Rishi Sunak has swiftly moved into the crowd-pleasing agenda of deciding what handouts he and Jeremy Hunt can serve up on Wednesday.

“Estimates of how much spare money the Government has to play with vary wildly, and we won’t know the true figure until the OBR releases its report this week, but we do know that Mr Hunt doesn’t have huge sums to play with. That means he’ll probably be looking for a goldilocks tax cut that boosts productivity, is popular enough that it appeases backbench MPs, doesn’t come with a huge price tag, and won’t risk fuelling inflation – it could be like finding a needle in a haystack for Treasury policymakers.

“The list of taxes rumoured to be on the chopping block is long and gets longer by the minute in the run up to the fiscal update. But clearly income tax will be the most popular tax cut with any worker: it affects the majority of workers, is easy to understand and has a direct impact on the money you take home each month. However, people shouldn’t get their hopes up too much as it’s expensive and also potentially inflationary. Having just dampened inflation, the Government doesn’t want to risk putting a load of cash in people’s back pockets that then stokes the fires of inflation once again.

“The Government may choose to announce tax reform this week that doesn’t kick in until April next year – meaning they get the positive glow of announcing tax cuts but delay their implementation until inflation is hopefully firmly in the rear-view mirror. You effectively get two good news boosts for your money – one now and one when the tax cut is introduced – which is crucial when Mr Sunak’s eyes are firmly on the next general election and drumming up popularity levels.”

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