Tories plan big cuts to inheritance tax, predicts George Osborne

Rishi Sunak could pledge big cuts to inheritance tax as “one big throw of the tax dice” before the UK general election, according to former Tory chancellor George Osborne, a move that would further strain public finances.

Jeremy Hunt, the current chancellor, last month said inheritance tax was “pernicious” and “profoundly anti-Conservative”, telling The Telegraph he hoped it was something a Tory government could look at “over time”.

Osborne claimed on his Political Currency podcast: “I think a pledge to abolish inheritance tax or all but abolish inheritance tax is probably coming down the track.” Allies of Hunt said the comments were “speculation”.

Hunt and Sunak have previously favoured cuts to national insurance — dubbed a “tax on workers” — ahead of cuts to inheritance tax, which is paid by just 4 per cent of estates.

The Institute for Fiscal Studies estimated last year that scrapping IHT would cost the Treasury £7bn and Labour said such a move would be a “strange priority” in a cost of living crisis.

The debate about future tax cuts is fuelling unrealistic speculation that ignores big looming threats to the public finances, two influential think-tanks said on Tuesday.

The winner of the national vote on July 4 could face a fiscal hole of £12bn to £33bn if current uncertainties turn into bad news and ministers seek to protect public services from further austerity, the Resolution Foundation think-tank warned.

In a separate release, the Institute for Fiscal Studies said a Labour government could “just” meet its pledge to invest an extra £23.7bn in the green transition without breaking its promise to get debt falling. But even a small downgrade to the latest fiscal forecasts could throw its plans off course.

Conservatives and Labour have said they will stick to the current fiscal mandate to put debt on a downward path within five years, the rule that has been the main constraint on fiscal policy in recent years.

Shadow chancellor Rachel Reeves has ruled out increases to most major taxes, while Hunt has promised tax cuts as soon as it is affordable.

Isabel Stockton, IFS senior research economist, said both parties were “avoiding the reality that they are effectively signed up to sharp spending cuts, while arguing over smaller changes to taxes and spending”.

A pledge by the main parties to put debt on a downward path within five years was “eminently gameable”, she added, but even so, it was “currently so constraining that it will either be breached, or will result in policies in practice quite different to those currently being peddled”.

James Smith, research director at the Resolution Foundation, said arguments over how to fund small commitments to higher defence spending or better pay for care workers were “distracting the electorate from the bigger question of how each party would manage the uncertainties facing the public finances”.

Spending on public services has fallen as a share of national income since 2010. However, a recent relaxation of austerity, combined with huge fiscal support during the coronavirus pandemic and cost of living crisis, means debt has still risen and the size of the state is similar to its starting point in 2010.

In March, the Office for Budget Responsibility fiscal watchdog said the government’s tax and spending plans left £9bn of “headroom” against its target to put debt on a downwards path by the fifth year of the forecast.

But the Resolution Foundation said there was a “significant” risk the outcome would be much worse than expected. Based on current market pricing for the path of official interest rates, government borrowing would be £2bn a year higher between 2024-25 and 2026-27 than the OBR had forecast.

One-off compensation for the victims of infected blood products would cost an estimated £10bn and higher spending on asylum and migration policies could “plausibly” cost an additional £4bn a year.

The think-tank said the OBR’s forecast for long-run productivity growth of 1.1 per cent a year, which underpins growth in future tax receipts, looked optimistic, as it was much higher than the recent average.

Even a modest change to this assumption could add about £17bn to borrowing by the end of the five-year forecast, the research found.

The government’s current spending plans implied that services outside protected areas, such as health, defence or aid, would face cuts of some £19bn a year, to keep debt on a falling path, the foundation said.

If the next government wanted to protect public services from further strain while still putting debt on a downward path, it would therefore need to find savings of £33bn by 2028-29.