Jeremy Hunt's latest economic decisions show how boxed in he is
When I saw tonight’s FT headline that the chancellor is considering the abolition of the non-dom tax status in next week’s budget I thought it must be an early April fool.
But it is true.
So concerned is Jeremy Hunt that he won’t have enough in the kitty for a sizeable cut in personal income taxes - a giveaway more-or-less promised by the PM - that he is considering even that capitulation.
The UK’s so-called non-dom status allows foreign nationals to live and work in the UK for 15 years free of the requirement to pay UK tax on their earnings on capital held abroad.
The prime minister’s heiress wife Akshata is perhaps the UK’s most famous non-dom (although she latterly volunteered to pay UK tax on her global income).
Labour has pledged to abolish the tax break for wealthy non-nationals.
It originally said this would raise more than £3 billion for its priorities, including reducing NHS waiting lists, but has downgraded the likely tally to nearer £2 billion.
That downgrade reflects the cost of some kind of replacement regime, to reduce the risk that valuable foreign workers would leave the UK. Tory chancellors have always resisted abolition of non-dom status.
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They claimed doing so would damage UK economic prospects, that it would deter highly skilled finance and tech professionals from taking employment-creating jobs here.
So it is a big moment that the Chancellor is even contemplating its abolition, even if in the end he does not do so next week.
It shows quite how boxed in he is, by recent and perhaps perverse movements in interest rates and inflation.
One counter-intuitive problem for Jeremy Hunt is that inflation is lower than the official forecaster the OBR thought it would be in the autumn, such that “fiscal drag” - the refusal to up-rate tax thresholds in line with inflation - raises less money than expected.
On the contrary, the yield on 10-year gilts - another name for the interest rate paid by the government when borrowing - has risen sharply in the last month.
So the OBR is forecasting that the government’s interest payments will be higher than it expected. The net effect is that there is less “headroom” in the OBR’s five-year debt projection for tax cuts, or almost no headroom at all.
Hence the Treasury’s decision to contemplate abolishing non-dom status. There is also raw politics here.
If the government were to end the non-dom tax break, and simultaneously cut employee national insurance, Labour itself would have even less money than it fears for its spending priorities - unless it were to reverse Tory tax cuts, which it has said it does not wish to do.
What the Chancellor ultimately decides will be conditioned by the OBR’s last two forecasts of the available headroom for tax cuts and spending, which he will receive in coming days.
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