Britain’s stifling tax burden

The overall intention of Jeremy Hunt’s Autumn Statement, which provided a £20bn package of tax cuts including a 2% cut in national insurance (NI) and a full expensing scheme for business, was to “make work pay”, says Jeremy Warner in The Telegraph. “Unfortunately, there was one rather big fly in the ointment.” The tax burden won’t actually fall, but instead will rise in each of the next five years, eventually reaching a “new post-war high of 38%”, according to the Office for Budget Responsibility (OBR). “For any Tory chancellor, this is an extraordinarily uncomfortable position.”

The main reason for this is fiscal drag, says Michael Race on the BBC. NI and income-tax thresholds have been frozen since 2021 and Hunt left them untouched. Although high inflation has led many workers to secure pay rises, over the past three years some 2.2 million more people are paying basic-rate income tax of 20% while 1.6 million have been dragged into the 40% tax bracket. According to the Resolution Foundation, households will be on average £1,900 worse off over the course of the current parliament.

The only reason Hunt can afford these tax cuts now is that high inflation has led to “windfall” tax revenues from businesses and households, says The Observer. That money should “rightfully have been channelled towards public spending, to help the public sector” (on which the less well-off disproportionately rely) to meet the rising costs of inflation. Diverting the cash now means a “further round of painful real-term spending cuts” after the next election. The Resolution Foundation finds that “outside the protected areas of health, education, overseas aid and defence, this would mean real-terms per-person public spending falling by 14% a year between 2022-2023 and 2027-2028.”

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Richard Hughes, chairman of the OBR, told MPs that Hunt’s statement carried a “very big fiscal risk”, implying that big public-spending cuts are “unlikely to be maintained”, says Mehreen Khan in The Times. Hunt’s tax and spending plans provide “£13bn in headroom to meet a self-imposed target to have debt falling by 2028-2029”. The OBR warns this headroom has been earned at the expense of departmental spending, which is due to fall by £19bn that year. 

Where’s the long-term vision? 
All told, despite Hunt trying to “make the best of a bad hand”, Britain faces “weak growth, stubborn inflation, upward pressures on public spending and the highest tax burden since the 1940s”, says The Times. A Labour government would face the same constraints. “Growth, growth, growth” may be the mantra of Keir Starmer and shadow chancellor Rachel Reeves, but they have yet to provide details and Starmer’s £28bn “green prosperity plan” appears to be withering.

Meanwhile, the OBR’s verdict on Hunt’s purported “110 growth measures” was to lower its growth forecast from 1.8% to 1.6%, says Martin Wolf in the Financial Times. That’s not because all the measures are bad but because it is “hard to accelerate growth”. Raising the investment rate, which the expensing of investment will help, is a good first step, and it is “particularly important for the UK”, which lags its peers by a considerable margin. However, one of the “investment-inhibiting consequences” of our government’s fiscal timetable, with its short-termism and endless budgets and statements, is uncertainty. We should learn from other countries, which “do not do things in such a complex way”.

The government could, for instance, set out a long-term vision and then focus on strategic goals such as investment, saving and innovation, and make budgets rarer events. If the UK is to escape the low growth and austerity it has been stuck in since 2008, the next government will have to make big changes. As Wolf says: “Politics is performative. Good policy is not.”

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