Myth one: the government has cut workers’ taxes
In his Autumn Statement, Jeremy Hunt announced a two percentage point cut in the main rate of National Insurance (NI), claiming that it would save the average nurse £520 per year. “Conservatives cut taxes when we responsibly can,” he said.
But the taxes paid by workers are not being reduced by this government. The fiscal outlook released today by the Office for Budget Responsibility (OBR) to accompany Hunt’s statement shows the government’s receipts from income tax rising by £26.3bn by the end of its forecast, and that the UK’s tax-to-GDP ratio would rise by 4.5 per cent after the same period. This will take the “tax burden” (the amount of tax levied relative to the size of the economy) to its highest level since the end of the Second World War.
The main reason a two-point cut to NI isn’t really a tax cut is that the government is also raising income tax by an effective four percentage points, using fiscal drag. By freezing the thresholds at which people start paying income tax and at which they start paying higher rates of income tax, Hunt and Sunak are implementing significantly higher taxes on 2.5 million workers. This is the biggest tax rise since 1979 and by 2027-28 will be “equivalent to a 4p increase in the basic rate of income tax”, according to the OBR.
The person paying for this hike is the average nurse: by 2027-28, more than a quarter of all teachers and more than one in eight nurses will have been pushed into the 40p tax bracket, according to the Institute for Fiscal Studies (IFS). The IFS also notes that a person on the full-time minimum wage of just over £20,000 per year will still be £248 worse off, after the two-point NI cut, as a result of the stealth rise in income tax.
All this adds up to a steep fall in real household disposable income of 3.5 per cent, which the OBR says will amount to “the largest reduction in real living standards since ONS [Office for National Statistics] records began in the 1950s”.
Myth two: the government has cut business taxes
Hunt also announced that he would make what he called “the biggest business tax cut in modern British history” permanent, by cementing the current “full expensing” rule that allows businesses to deduct the full cost of some investments, such as plant and machinery, against the profits on which they pay corporation tax.
The Chancellor was right to say that Britain’s business investment is lower than other major economies, and that this holds back economic growth. But as with NI, today’s policy is a warm handshake combined with a punch in the face: full expensing was introduced, at a cost of £10bn a year, by Jeremy Hunt in April of this year to mitigate some of the pain caused by Jeremy Hunt in April of this year, when he raised corporation tax from 19 per cent to 25 per cent – the biggest business tax rise in modern British history.
In fact full expensing is less of a tax cut and more of a subsidy for certain kinds of investment. As the IFS explains, it is biased towards certain businesses (only incorporated companies can claim), certain assets (plant and machinery), and especially to those companies that borrow to invest.
If a company borrows to invest, it can deduct not only the cost of the thing it has bought but also the interest on the loan, leading to a negative marginal tax rate. The IFS calls this an “undesirable subsidy” for dodgy investments: “Economic growth is not well served by subsidising unproductive investments that would be unviable in the absence of tax.”
Myth three: the government can afford to cut taxes
“Our fiscal headroom has doubled,” the Chancellor declared. But the £13bn of “headroom” that is apparently available isn’t really there, because demands for spending will also increase.
It’s true to say the economy has grown in size, thanks to inflation: higher prices and wages make for a higher GDP reading, and if the government doesn’t make allowances for tax (and especially if it increases the tax burden, as it is now doing) its income increases. But at the same time, the government – the biggest buyer of goods and services in the economy – will eventually face higher costs. This is a big part of the situation local authorities find themselves in now, as the companies they contract for public services increase their bills in line with inflation. And as we’ve seen in more than a year of strikes and pay negotiations across the public sector, workers seek to do the same thing.
The headroom calculation doesn’t account for this. Instead it assumes real-terms cuts that would be similar in scale to the austerity programme of the 2010s. The OBR forecast today states that if the government maintains its commitments on defence and overseas aid spending, “unprotected” government spending in areas such as transport and prisons will face real-terms cuts of 4.1 per cent every year from 2025-26. By 2027-28, according to the OBR, real-terms spending will be £19.1bn a year lower as a result of the measures Hunt announced today.
The OBR itself notes the Institute for Government’s latest report, which found that eight of the nine major public services in the UK have declined in performance since 2010. The Resolution Foundation goes further, calling the headroom claim a “fiscal illusion”; in a country in which the prisons are overflowing and even newly built schools are unusable, it is simply not realistic to pretend that these cuts can be factored into the national accounts.
Myth four: the government has halved inflation
Hunt committed to “continue to bear down on inflation” in today’s speech, and while inflation is doubtless very concerned at being borne down upon by the Chancellor, it is the Bank of England and the international energy market that have halved inflation, by raising the cost of borrowing (higher interest rates) and lowering the cost of gas. Voters know this and are not fooled by such posturing.
Government policy has done very little, and the impact that has been achieved on prices and wages has been to depress aggregate demand by raising income tax and cutting public services.
If anything, Hunt’s policies today give a small boost to inflation, as outlined in the OBR forecast: “The small boost to aggregate demand from the government’s policy package, raises inflation in the near-term incrementally, increasing consumer prices by 0.1 per cent at our forecast horizon.”