Jeremy Hunt’s move to cut national insurance risks interest rates remaining high until the summer of 2024, economists have warned.
The chancellor cut national insurance contributions (NIC) by 2 per cent, but financial experts say the Bank of England may now have to hold high rates for longer.
The Office for Budgetary Responsibility (OBR) has said there will be higher levels of inflation than previously expected, revising its estimates after Mr Hunt’s autumn statement.
There are now fears that the central bank will have to hold the base rate of interest at 5.25 per cent into the summer, despite widespread hopes it would be cut in the spring.
“While the degree of extra fiscal support is a little more limited than that of March, it helps at the margin to support the case for keeping interest rates on hold for longer,” George Buckley, economist at Nomura, told The Telegraph.
Benjamin Nabarro, an economist at Citi, also forecast a delay in the Bank of England bringing down the interest rate, predicting Mr Hunt would cut taxes again in the spring.
“We expect both [sets of tax cuts] to push back the start of Bank of England cuts to the third quarter,” he said, expecting tax cuts to tip the balance towards a more “hawkish” stance on interest rates.
Richard Hughes, chairman of the OBR, suggested the watchdog was relaxed about the potentially inflationary impact of the autumn statement. “In essence, because borrowing is unchanged,” he explained on Thursday.
The chancellor and PM at the Nissan factory in Sunderland
At a post-statement briefing with reporters, Mr Hughes declined to say if inflation could have come down more quickly without Mr Hunt’s tax cuts.
But the OBR has revised its official estimates – saying inflation would fall to 2.8 per cent by the end of 2024, before finally hitting the Bank of England’s 2 per cent target in 2025.
This indicates higher inflation than previously projected by the OBR in the spring, after it guided towards an inflation rate of 0.9 per cent for 2024.
Meanwhile, a senior Tory minister has rejected suggestions that Mr Hunt is planning to engage in a George Osborne-style austerity drive.
Mel Stride, the work and pensions secretary, told ITV’s Good Morning Britain: “I really don’t see us going into any era of austerity.”
The Institute for Fiscal Studies (IFS) warned that the autumn statement puts Britain on course for public sector cuts even more “painful” than the Tory austerity period of the 2010s.
Sunak and Hunt are expected to slash taxes in the spring Budget
The IFS and other big economic think tanks have pointed out that the chancellor had in effect found £20bn for tax cuts in the autumn statement by choosing not to protect some departments.
But Mr Stride said: “I don’t think we’re heading into that at all,” when asked on LBC whether Britain was headed for “austerity mark two”.
Challenged on the huge public spending cuts ahead, Mr Hunt told the News Agents podcast that was “so left-wing” to ask such questions – insisting greater growth helped by tax cuts would “unlock” more money for government.
“You are saying the only way to increase resources going into public spending is to give more of the cake to public spending and less to tax cuts,” he said. “What Conservatives believe is that you can grow the size of the cake.”
Meanwhile, in a boost for Mr Sunak and Mr Hunt, the government has confirmed that Nissan will produce two new electric vehicle models at its Sunderland plant.
The PM dismissed concerns that investor confidence in the UK has been harmed by his net zero policies, highlighting commitments made to Britain by “company after company”.
