The chancellor hinted that business levies will be slashed to boost the economy – and help fund the NHS – when he sets out his autumn statement on Wednesday.
Higher tax revenues and lower borrowing costs have given the Treasury billions of pounds more in what is called “fiscal headroom”.
In a move that risks accusations that the Conservatives are favouring the wealthy, he is considering cutting inheritance tax as well as lowering taxes for small businesses.
The chancellor told The Independent that for those looking for light at the end of the tunnel on tax cuts, this week’s fall in inflation was “very significant”. “What that means is that now we can see that inflation has halved ... we can move to the next part of our plan, which is long-term economic growth,” he said.
He refused to be drawn on individual measures ahead of next week, but added: “The priority should always be business tax cuts if you have headroom for cuts. Because in the end, what we need to do is to improve the long-term capacity of the British economy to generate the wealth we need to pay for the NHS.”
And he pledged a further crackdown on welfare and tackling inefficient public services would be unveiled next week. “If you want to control the size of the state, you do need to include welfare reform as one of your priorities,” he said.
On Thursday he announced ministers would strip benefits claimants not looking for work of the right to free prescriptions. He also highlighted public sector efficiency.
“There is a big opportunity to improve the efficiency of the state,” Mr Hunt said, adding that doctors, nurses and police officers were spending too much time on admin.
Tax cuts for small businesses could include raising the threshold at which they pay VAT from £85,000 to £90,000. It is thought that Mr Hunt will also extend “full expensing”, a way for firms to offset their investments against corporation-tax payments.
And it’s thought he may bring a squeeze on benefits. Typically ministers use the September figure for inflation when uprating working-age benefits, which would mean a 6.7% hik, but Mr Hunt has not ruled out using October’s far lower figure of 4.6%.
The chancellor is facing mounting pressure from Tory MPs to cut taxes, with the overall tax burden at a postwar high and economic growth flatlining.
Inheritance tax is charged at 40 per cent on estates worth more than £325,000, with an extra £175,000 allowance for those that are passed on to children or grandchildren.
The Treasury is reportedly considering cutting the rate to 30 per cent and increasing the threshold at which it kicks in, though a source said changes to the tax could be pushed back to the Budget next spring.
Mr Hunt has held firm until now against tax cuts, saying he would like to introduce them in the future but arguing that the most important task was to tame inflation. But after inflation fell by more than expected, to 4.6 per cent, the chancellor has faced increasing calls to use the extra flexibility to lower taxes.
Mr Hunt is thought to believe that slashing inheritance tax would not fuel inflation, and would also be significantly cheaper than an income tax cut.
Despite a widely held view that inheritance tax is unpopular, the levy is only applicable to just over one in 20 estates in the UK.