Chancellor Jeremy Hunt is reportedly considering reducing National Insurance (NI) contributions rather than income tax in the upcoming Budget. The move follows the announcement of a larger-than-expected cut in NI at last year’s Autumn Statement, reducing the primary rate from 12% to 10%. Hunt is contemplating a similar approach this year, focusing on what he calls “smart tax cuts” to boost the economy. However, a leading think tank, the Institute for Fiscal Studies (IFS), has warned against tax cuts without a clear plan on how to fund them. The IFS emphasized the need for detailed spending reviews before implementing specific tax reductions.

Last year’s NI cut was estimated to create 28,000 more jobs, and a potential 1% further cut could cost £4.5 billion annually. Both Hunt and Prime Minister Rishi Sunak have expressed a desire to reduce the tax burden on the public. The IFS cautioned against tax cuts without specific details on where spending reductions would occur and suggested waiting for a detailed spending review.

The IFS highlighted the rising level of taxes in the UK relative to the overall economy and urged caution in pursuing further significant net tax cuts in the upcoming Budget. While acknowledging the potential for tax cuts to stimulate economic growth, the IFS recommended reforms such as revisiting stamp duty on property and shares instead of reducing income tax or NI rates.

The UK government is also reportedly considering introducing a new tax on vaping products in the Budget. Currently, vaping products are subject to VAT but lack a dedicated levy similar to tobacco. The government is exploring increasing tobacco duty to ensure vaping remains comparatively cheaper.

The Budget decisions come amid challenges, including rising government debt and pressure on public finances. The IFS warned against relying on uncertain spending cuts and urged comprehensive tax reforms rather than sizable net tax cuts. The political landscape adds extra significance to the upcoming Budget, potentially influencing policy changes before a scheduled general election next year.

The government has not provided specific comments on the affordability of further tax cuts in the Budget. The Treasury noted that detailed departmental budgets would be set as usual at the following Spending Review, emphasizing its commitment to meeting fiscal rules and increased funding for the NHS.

The Budget announcements will be closely watched as they could represent the last chance for significant policy changes before the next general election. Despite a forecasted reduction from previous estimates, the government is set to borrow £113 billion this year, twice the pre-pandemic borrowing level.

The Treasury highlighted its responsible fiscal actions, allowing for tax cuts in the Autumn Statement, and expressed confidence in meeting fiscal rules while increasing funding for essential services like the NHS. The final decisions on Budget plans are expected to be made by Chancellor Jeremy Hunt at the end of this week.