Jeremy Hunt plan to cut taxes and raise spending would cost up to £40bn and 'exacerbate' UK's financial problems, think-tank warns

Jeremy Hunt’s plan to hike spending and cut taxes if he becomes prime minister would “exacerbate” the UK’s financial problems, a highly respected think tank has said.

The Tory leadership candidate has already announced pledges that would cost up to £40bn, according to the Institute for Fiscal Studies.

Mr Hunt, who is vying with Boris Johnson in the battle to succeed Theresa May, has laid out plans to cut corporation tax, ramp up defence spending, raise the threshold above which workers must pay national insurance, and cut the interest rate on student debt.

The IFS said the proposals for higher spending and lower taxes would “amplify the long-run challenges facing the UK public finances” and “exacerbate” spending pressures.

The funding gap would need to be met through higher borrowing, tax increases elsewhere or cuts to spending in other areas, it said.

Mr Hunt’s promise to increase defence spending from 2 per cent to 2.5 per cent of national income is likely to be the most expensive of his promises, costing £15bn a year by 2023-24, according to the think-tank.

The IFS said that reversing the trend of falling defence spending as a proportion of national income would mean there was less money available for the NHS, welfare and other public services.

Mr Hunt’s plan to cut corporation tax to 12.5 per cent from the current 19 per cent would cost around £13bn per year initially, the IFS said, although this figure would likely decrease over time.

The think-tank said it was not “plausible” to suggest this could be offset by companies making bigger profits – meaning Mr Hunt would have to spell out how he would fund the cut.

The foreign secretary’s promise to raise the threshold at which employees have to start paying national insurance was an effective way to help the low-paid, the IFS said, but it warned that the plan would cost at least £3bn each year for every £1,000 by which the threshold is raised.

Raising it to the current income tax personal allowance of £12,500 would cost at least £11bn per year, it said, although such a move would stop 2.4 million workers having to pay national insurance entirely.

Mr Hunt’s pledge to cut the rate of interest on student loans would only cost £1bn, according to the IFS, although it would only benefit the highest earning 30 per cent of graduates.

The foreign secretary has said he would fund his pledge partly by decreasing the rate at which the government pays off the UK’s debt, although he has promised to ensure that debt as a proportion of GDP will continue to fall.

Paul Johnson, director of the IFS, said: “Like his rival, Jeremy Hunt has made some expensive pledges in his campaign to become prime minister. Cutting the corporate tax rate to 12.5 per cent could cost £13bn a year in the short run. While the long run cost is likely smaller this is not a tax cut that could pay for itself as some have suggested.

“More radical relative to recent history is his proposal for a significant increase in defence spending. A £15bn increase, alongside the proposed corporate tax cut, would leave no scope to relieve the pressure on other areas of public spending without tax rises or a fiscal stance which risked putting debt on a rising path”.

A spokesperson for Mr Hunt said: "Jeremy’s pledges are designed to turbocharge our economy, attracting inward investment and driving growth. By growing our economy we can afford to invest in our public services, support the lowest paid and ensure that Britain walks tall in the world again, all while ensuring that debt continues to fall.”