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Jeremy Hunt’s stealth tax raid to put ‘significant’ pressure on UK household finances

The Chancellor of the Exchequer Jeremy Hunt - Jordan Pettitt/PA Wire
The Chancellor of the Exchequer Jeremy Hunt - Jordan Pettitt/PA Wire

Jeremy Hunt’s stealth tax raid will pile “significant” pressure on UK households over the next few years, the OECD has warned.

The Paris-based organisation said the Chancellor’s decision to freeze income tax thresholds until 2028 will “significantly increase fiscal pressure on households, pushing 1.7m people to start paying income taxes and 1.2m people to pay higher rates”.

It comes as the OECD warned that global financial markets could be thrown into turmoil by stubbornly high interest rates.

The group said that rising borrowing costs could put the worldwide financial system under extreme stress and send share and bond prices tumbling.

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The OECD has predicted average growth of 1.4pc across its 38 member countries, but said the upturn was “fragile”.

“One key concern is that inflation could continue to be more persistent than expected. Significant additional monetary policy tightening may then be required to lower inflation, raising the likelihood of abrupt asset repricing and risk reassessments in financial markets,” the OECD said in its economic outlook.

It added that it expects the UK to avoid recession this year, though the economy is expected to grow by just 0.3pc, up from its previous prediction of a 0.4pc contraction.

However, the OECD said Britain’s inflation would be among the highest in the 38 member club of industrialised economies in 2023 as food prices and underlying inflation remain stubbornly high.

The group’s criticism of so-called “fiscal drag”, which forces workers to hand more of their pay rises to the taxman as thresholds fail to keep up with the cost of living, has already been likened to a 4p increase in the basic rate when combined with employer national insurance contributions, raking almost £30bn extra a year by 2027-28.

The OECD warned that “little fiscal space is left” for tax cuts, with the UK’s growing debt pile “leaving the government significantly exposed to movements in interest rates”.

Economists said the Treasury could be forced to pay billions of pounds more in interest on the UK’s debt as “significant additional monetary tightening” may be needed globally if inflation proves persistent.

The OECD’s warning comes even as Western central banks have already raised interest rates at the most aggressive pace in decades to highs last seen during the financial crisis.

Mr Hunt’s wafer-thin fiscal headroom means the UK Government would be highly exposed to further large rises in borrowing costs, the OECD cautioned in its closely watched forecast.

The Chancellor has only left himself a buffer of £6.5bn to meet his own fiscal rule of getting debt-to-GDP falling within five years, the smallest of any chancellor since at least 2010.

While the OECD upgraded the UK’s growth forecast for 2023, it warned that the thin margin could thwart the fragile recovery:

“Significant risks surround the [UK] outlook. The high interest burden on public debt and the recent drop in average debt maturity leave the public finances exposed to movements in bond yields,” the OECD said.

Its forecasts highlighted that inflation in the UK has kept “broadening” – meaning it is rippling through different parts of the economy.

This is usually a warning sign that is becoming persistent.

This was also reflected in separate OECD data on Tuesday, which found that the UK had by far the highest rate of core inflation in the G7 in April at 6.2pc.

Inflation in the UK is expected to average 6.9pc in 2023, which is more than three times the Bank of England’s 2pc target. It will then fall to 2.8pc the following year.

The intergovernmental organisation also revised up its assumption of interest rates from March, predicting that they will peak at 4.75pc instead of 4.25pc.

Inflation will only return close to the Bank’s 2pc target by the end of next year, it said.