Personal tax cuts are not on the cards until soaring prices are brought under control, ministers have hinted as the Bank of England predicted inflation will top 11% in the autumn.
As the Bank’s Monetary Policy Committee raised interest rates to 1.25% – the fifth rise in succession – Rishi Sunak and Michael Gove appeared to indicate that fellow Conservative MPs pushing for tax cuts would have to wait as such measures could fuel runaway inflation.
The Chancellor told the Bank’s Governor Andrew Bailey that fiscal policy must remain “responsible” and not “exacerbate” inflation.
In a letter to Mr Bailey, Mr Sunak wrote: “This is why, in responding to urgent cost of living pressures that people are facing, I announced a series of measures which are timely, targeted, and temporary to help households manage the squeeze on real incomes whilst not adding unnecessarily to inflation”.
Communities Secretary Mr Gove later said he agreed with Mr Sunak that tax cuts should be shelved until inflation is brought down.
Asked if that would have to wait until 2024, Mr Gove told TalkTV: “The Chancellor has the right policy… He can’t spend all of the public money that many would wish to and which, in a perfect world, we’d like unto”.
He added: “You’ve got to make sure that you balance the books at a government level”.
Earlier on Thursday, Mr Gove told The Times CEO Summit in London that the pressure on the public finances meant the Government was unable to provide the level of support to people that it would like.
“When you are squeezing inflation out of the system, you will rely on the Bank of England and the Government having the fiscal and the monetary policies which will inevitably mean we cannot do all the things that we would, in ideal circumstances, like to do in order to support people through a difficult period,” he said.
Cost of living has been soaring for months, with consumer prices index (CPI) inflation hitting a 40-year high of 9% in April when the energy price cap was hiked.
But things are set to get even worse later this year, with the Bank of England raising its peak inflation prediction for October – when energy prices could go up even further – from 10% to over 11%.
Mr Sunak has announced multi-billion pound help for struggling households, much of which is set to come in when energy bills rise again in October.
But it might provide somewhat of a double-edged sword, the Bank said, adding another 0.1 percentage points to CPI in the first year.
In a TV interview, the Chancellor pointed to the lifting of the threshold at which employees start to pay national insurance in a few weeks as he insisted the “direction of travel is to reduce people’s taxes”.
But he appeared to reject further short-term tax cuts, telling ITV News: “I will make sure that I handle our borrowing and debt responsibly so that we don’t make the situation worse and increase mortgage rates more than they otherwise are going to have to go up.”
The Chancellor added that people should be “reassured” that inflation will be tamed through “constrained borrowing and debt”, action by the Bank of England and measures such as improving energy supply.
“People should feel confident that we will get through this, we will get inflation down and strong growth will return,” he said.