UK chancellor Jeremy Hunt will on Friday take on rightwing Tory MPs by rejecting calls for big tax cuts in his Budget, insisting he can grow the economy without another wave of debt-funded fiscal loosening.
In a speech to tech investors, intended to lay the ground for his March Budget, Hunt will say: “The best tax cut right now is a cut in inflation.”
Hunt and Rishi Sunak, prime minister, have prioritised the halving of inflation this year and one ally of the chancellor said: “We won’t do anything that makes this job harder.”
A growing number of Conservative MPs, including former party leaders Liz Truss and Iain Duncan Smith, believe tax cuts are needed in the Budget to shake Britain out of its low growth torpor.
Hunt is deeply frustrated by what Treasury insiders say is the “short memory” of people who forget the market turmoil unleashed last year by the Truss government’s experiment with debt-funded tax cuts.
Hunt will use his speech to argue that he can generate growth without resorting to unfunded tax cuts, through measures to stimulate the labour market and better regulation.
He will take on a “declinist narrative” and insist that the government is backing growth sectors of the future, including rewriting regulations to take advantage of “Brexit opportunities”.
In his Autumn Statement, Hunt asked Sir Patrick Vallance, the chief scientific adviser, to lead new work on how to change regulation “to better support safe and fast introduction of new emerging technologies” and create “the next Silicon Valley in the UK”.
Hunt’s allies admit that the chancellor has been subject to claims he does not have a growth strategy; his statement last November was dominated by his £55bn package of tax rises and spending cuts.
“There was a growth strategy, but people didn’t notice,” Hunt has admitted to colleagues. However, a narrative has taken hold that the Treasury is more interested in balancing the books than bolstering growth.
Sir James Dyson, the entrepreneur, claimed this month that Sunak’s government had made growth “a dirty word”, while the CBI employers’ group has also been strongly critical.
To try to sharpen his “growth” message, Hunt will say he will focus on “Four Es” — enterprise, education, employment and everywhere”. The last is a reference to the government’s “levelling up” agenda.
His insistence that Brexit can help boost the economy will please some of Hunt’s Tory critics, although many economists argue that leaving the EU is one of the causes of Britain’s current malaise.
The chancellor will highlight on Friday previously announced reforms to Solvency II rules, the EU-era regulation of the insurance sector, as a means of unleashing billions of pounds to invest in green energy schemes.
He has promised to announce by the end of the year changes to EU regulations in five growth industries: digital technology, life sciences, green industries, financial services and advanced manufacturing.
Hunt will tell his audience that he will address Britain’s tight labour market through a series of measures to tackle inactivity, particularly among the over-50s and the long-term sick.
The Treasury has asked dozens of executives from the tech sector, including founders, chief executives and investors from venture capital firms, to a meeting after Hunt’s so-called “growth” speech to emphasise the government’s commitment to supporting UK technology.
Those invited said there was still scepticism about whether the Treasury would be able to back any of the plans, including a new strategy being drawn up for the semiconductor industry, with new public money to help incentivise private sector investment.
Tech bosses have also questioned how much pension fund cash would be freed by Solvency II reforms for alternative asset classes and how much would go towards growth companies.
They warned that the government risks falling behind rival countries in key growth areas such as green technology given the massive state subsidies being proposed in the US and EU.
“We need to reverse the narrative of high taxes and low growth,” said one attendee, who pointed out that a defence of the first would undermine any growth ambitions in the chancellor’s speech.
Many in the tech sector also point out that the Treasury’s decision to scale back the R&D tax credit scheme will cause significant damage to the UK’s tech start-up ecosystem.