Jeremy Hunt: Tax reductions are nearly impracticable

So far, inflation has slowed to 6.7 percent last month, down from a peak of 11.1 percent hit last October.

High inflation has generated additional tax revenue for the Chancellor, but higher borrowing costs have also raised government spending on the £2.5 trillion national debt.

The Treasury borrowed another £11.6bn last month, according to the Office for National Statistics, £3.5bn more than in the same month in 2022, as spending rose faster than income.

So far this financial year, the Government has borrowed £69.6 billion. This is £19.3 billion more than it borrowed in the same period last year, but crucially it is £11.4 billion less than the OBR predicted.

This has raised hopes that the Chancellor may have a little more scope to increase spending or cut taxes in his Autumn Statement in November, or in next spring’s pre-election Budget.

However, Carl Emmerson, deputy director of the Institute for Fiscal Studies (IFS), warned that only small or temporary tax cuts could be justifiable given the pressures facing the public purse.

The improvement in public finances compared to the OBR forecasts “cannot really be used to pay for a permanent tax cut of any magnitude”, he said.

Even if borrowing is below the OBR forecasts, the figures will likely still be worse than the fiscal watchdog expected in 2022.

The Chancellor was just a hair’s breadth away from meeting his target of reducing debt, Mr Emmerson said.

‘Big problem’

Paul Johnson, director of the IFS, said that although debt levels were set to fall, the national debt accumulated after the pandemic remained a “big problem”.

He told BBC Radio 4 that while both Labor and the Conservatives were committed to reducing the national debt, which is the highest since the 1960s, it would prove difficult.

He said: “It’s difficult for a number of reasons: one is that we are paying an enormous amount of interest payments on debt, more than we have done in generations.

“We are already raising taxes and that is not enough to offset this increase in debt.

“And the third problem is that this is happening even though the spending plans set out in the Budget are really very tight.”

Investec economist Philip Shaw said it should ultimately be possible to find room for some tax cuts.

“Mr Hunt will be keen to bolster his fiscal credibility in November’s Autumn Statement and will refrain from loosening his purse strings,” Mr Shaw said.

“However, unless we see a material worsening in the direction of public borrowing, we have a feeling that some tax cuts will be included in next spring’s budget, even if the Chancellor has to dig deep into the backstop of the sofa to find the money to be able to do it.”