Chancellor Jeremy Hunt 'shelves plans for 2p cut to income tax' after UK slips into recession

16 February 2024, 03:45 | Updated: 16 February 2024, 03:53

Chancellor Jeremy Hunt has shelved plans for a 2p cut to income tax after the UK slipped into a recession.

Mr Hunt was understood to have been considering reducing the basic rate of income tax from 20 to 18 per cent.

A reduction to National Insurance employee contributions was also being considered as an alternative.

But after it was revealed that the UK had slipped into a recession at the end of 2023, the plans were dropped.

GDP, which measures the value of goods and services produced, shrank 0.3% between October and December last year.

The fall is sharper than expected after economists had originally forecast a 0.1% decline.

It followed a contraction of 0.1% in the third quarter of 2023 between July and September, meaning the UK economy contracted for two consecutive quarters at the end of the year.

A recession is defined as two consecutive quarters of negative gross domestic product (GDP).

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A Treasury source told The Telegraph: “The world has changed. Everything you thought was going to happen [at the Budget] may not now happen.”

Work and Pensions Secretary Mel Stride warned that high levels of worklessness are partly responsible for the recession.

He said: "The shadow of economic inactivity – people not in work nor looking for it – continues to hang over our nation."

"I find it deeply concerning that 2.8 million people are now off sick – missing out on the financial, social and health benefits we know work brings, and denying the engine of growth, our fantastic British businesses, the labour they need," he added.

But some Tory MPs are continuing to call for taxes to be slashed, despite the UK dipping into a recession.

Ex-Business Secretary Jacob Rees-Mogg said: "The economy clearly needs a boost and this should come in the form of lower interest rates and tax cuts."

Meanwhile, former cabinet minister John Redwood said: “The government must take more action. The forecasts will show they can afford tax cuts."

Reacting to the figures on Thursday, Mr Hunt said "low growth is not a surprise" but insisted the economy is still "turning a corner".

He said: "High inflation is the single biggest barrier to growth which is why halving it has been our top priority. While interest rates are high - so the Bank of England can bring inflation down - low growth is not a surprise.

"But there are signs the British economy is turning a corner; forecasters agree that growth will strengthen over the next few years, wages are rising faster than prices, mortgage rates are down and unemployment remains low.

"Although times are still tough for many families, we must stick to the plan – cutting taxes on work and business to build a stronger economy.”