The hidden nasties Jeremy Hunt could leave for Labour

Jeremy Hunt will this week deliver what will likely be his last Autumn Statement before the election next year – and possibly his last ever.

With Labour 23 points ahead in the polls, Rachel Reeves may be the one stepping up to the Despatch Box this time next year.

Rumours are already swirling that Hunt may step down after a nearly two-decades-long political career that has included several senior cabinet roles. Hunt has been forced to deny that he will resign ahead of the next election as he faces possible defeat by the Lib-Dems in his Blue Wall seat.

Even still, he must know his days are likely numbered. As he pores over forecasts from the Office for Budget Responsibility (OBR) telling him how much spare cash he has, the election will be at the front of his mind.

“I’m sure he will do some laying of traps,” says former chancellor Philip Hammond, who admits such deliberations were a big focus during his time in Number 11 despite leaving before the snap election in 2019.

Budget traps fall into two camps: political landmines that your opposition can step on before the election or, if the other side wins, hidden nasties that they will uncover long after you have left Downing Street.

Hammond believes Hunt will focus on the former: “It won’t be for a Labour government after the election. Nobody cares.

If you lose the election, you don’t really care about that.”

While he is constrained by his own fiscal rule of getting debt falling within five years, Hunt has a number of options. The most obvious one is pre-election giveaways.

Despite having a historically small amount of space cash to spend, Hammond believes Hunt will use up his headroom “because he’ll want to do whatever he can to send positive signals ahead of an election”.

There is great pressure from within the Conservative Party to cut taxes following what has been Britain’s biggest tax-raising parliament since the Second World War.

Tax cuts are seen as a vote winner that could help to reverse the Tories’ woeful polling numbers.

“Is he going to announce tax cuts that Labour find it difficult to say they’re going to reverse? Because that then uses up headroom for Labour on their spending plans,” says Tom Pope, deputy chief economist at the Institute for Government.

Mr Hunt has drawn up plans to cut inheritance tax, The Telegraph reported last week, after officials concluded the change would not be inflationary.  

Polling from YouGov shows inheritance tax is a close contender to being Britain’s most unpopular tax.  

“Not very many people pay inheritance tax but lots of people worry about paying inheritance tax,” says Paul Johnson, the head of the Institute for Fiscal Studies.

Other options the Chancellor has explored include cutting stamp duty and raising the higher-rate income tax threshold, although Hunt may choose to save the fireworks for the Spring Budget closer to the election.

If taxes are cut, Labour would have to commit to maintaining the policies or risk people feeling they are voting for higher taxes.

However, if they do commit to keeping tax cuts, many of Labour’s election pledges will look increasingly unaffordable without higher borrowing or taxes.

However, Hunt is trapped in the same fiscal vice, which means large tax giveaways are extremely difficult.

The Chancellor already has the slimmest buffer of emergency cash of any chancellor since at least 2010.

The OBR in March deemed he had £6.5bn to spare against his fiscal rule of getting debt falling within five years. It may have risen to around £13bn since, the Resolution Foundation estimates, as high inflation and strong wage growth have bolstered the public coffers and meant borrowing has undershot.

However, Johnson says: “I’d be surprised if there are any big announcements.

“If there’s an inheritance tax cut from 40pc to 30pc, that’s a couple of billion, that’s a very, very small announcement. I don’t think he has space for anything really very big.”

Inflation means Hunt will likely want to maintain some of his fiscal buffer to stop the Government blowing its fiscal rules.

However, there is a cheaper way for Hunt to lay traps: consulting on future changes.

Hammond says: “The laying of traps will be to set out plans or to consult on things which force Labour to take a position on things they would rather not have taken a position on.”

The former chancellor recalls using this tactic against Labour’s then shadow chancellor John McDonnell while Hammond was in Number 11.

“All the time I was trying to expose the internal contradictions, the fundamental flaws in John McDonnell’s position.”

The most obvious corner Hunt could trap Reeves in would be on inheritance tax. The Chancellor could launch a consultation on scrapping the levy altogether, even if headline reductions in the rate are only minor in the Autumn Statement.

Labour is drawing up plans to toughen inheritance tax plans by closing loopholes, meaning a consultation on scrapping it would put clear blue water between the two parties.

Hammond says: “I suspect he’ll announce several consultations on quite controversial things and that will force the Labour Party to say where they are on those things ahead of the election.”

This could wrest control of the narrative into the hands of the Government, forcing Labour to respond.

Johnson says: “For Labour, it depends on how they see the politics playing out.”

There is a long history of chancellors playing politics with their budgets – but it is a dangerous game to play, as former Conservative chancellor Norman Lamont found out.

In 1992, Lamont slashed taxes by creating the 20p lower rate of income tax, raising personal allowances and halving levies on new car sales. 

The day after, then prime minister John Major announced the general election. Labour had been predicted to narrowly win but Major won the day.

However, it proved to be a short-sighted political calculation.

The following year Lamont was forced to announce sweeping tax rises, raise VAT on energy bills and freeze tax thresholds in order to balance the books.

Johnson says: “Before the 1992 election Lamont - at a time when there really wasn’t money around - announced some tax cuts and spending increases. That actually came back to bite him because after the 1992 election, he had to announce some massive tax increases.”

Lamont has since admitted it was “not a very good budget. But it did help us to win the 1992 election”.

Conversely, the post-election budget “helped to lose the 1997 election for the Conservatives, but it was definitely my best budget”, he has said. He resigned after turning down a demotion months later.

Pope says: “Is Hunt going to be a political chancellor who is basically delivering everything with a view of what’s going to be most beneficial at the election? Or is he a sort of legacy chancellor that when people look back, they’ll say Hunt inherited a very difficult situation and bequeathed a much better one?

“I think [the latter] would be good policymaking but [it] is possibly not where the politics leads you.”