Britain cuts taxes again. Why now?

At least once a year, Britain’s top financial official stands in Parliament to set out what has always been his tax and spending plans, which are normally designed to boost economic growth and reduce debt levels. to keep the country under control. This year, Jeremy Hunt, the Chancellor of the Exchequer, had to consider another priority: the upcoming general election.

And so Mr. Hunt announced Wednesday that he would cut taxes for nearly 30 million workers. From next month, the rate of National Insurance, a payroll tax paid by employees and employers that finances state pensions and certain benefits, will be reduced by two percentage points for employees and the self-employed. It will save the average worker about 900 pounds ($1,145) a year, Mr Hunt said.

How did the markets react?

Eighteen months ago, tax cuts and a plan to boost economic growth sent shockwaves through financial markets and ultimately pushed Liz Truss out of her job as prime minister. This time the British pound and government bonds hardly budged.

That’s because the tax cuts announced by the Conservative Party are smaller and, crucially, are partially offset by some other tax increases. And Mr. Hunt didn’t announce much additional spending.

The policy changes were also accompanied by predictions about their economic and budgetary impacts by the Office for Budget Responsibility, an independent watchdog.

Will the cuts help the Conservative Party’s prospects?

Less than four months ago, Mr Hunt cut the National Insurance tax rate. It has not helped the Conservative Party’s position much in the polls, where it trails far behind the opposition Labor Party. There are hopes that additional cuts will appeal to voters as the government waits for the broader economic outlook to improve. Lower inflation is expected to help workers benefit more from wage increases, and the Bank of England is expected to cut interest rates later this year, which should ease pressure on household budgets.

What do the British public want?

The British would prefer the government to do that to focus on financing public services rather than tax cutsThis is evident from recent YouGov opinion polls. But what they want even more is for the government to spend money easing the cost of living, such as measures to reduce food or energy bills. (The polls did not specify what these measures would be.)

There is a clear sense of frustration with public services, with eight in 10 Brits believing the state is in poor shape, YouGov polling showed.

Economists say the government needs this urgently increase investments, which has been weakened in an attempt to keep the national debt low. Net public sector investment as a share of gross domestic product is expected to decline over the next five years, according to forecasts from the Office for Budget Responsibility.

How bad is it really?

Public services are under enormous pressure: more than seven million patients are waiting to be treated by the National Health Service, and dentists are not taking patients. Last year, schools were ordered to close due to crumbling concrete prisons have been allowed to release some people early due to overpopulation. Another sign of tension can be seen in local government, where several municipalities – the local government bodies that fund services such as child and adult care, and waste collection and recycling – have recently decided actually declared themselves bankrupt.

Even if More government money has been set aside for municipalities, many still have to announce major cuts. While some municipalities have made poor financial decisions, these have been exacerbated by a long-term decline in national government funding.

On Tuesday, Birmingham City Councilone of England’s largest, has signed off on major cuts, including plans to end all arts funding as part of a plan to save £300 million over the next two years.

What is stopping the government from doing more?

The Chancellor’s budget choices are tied to three self-imposed budget rules that Mr Hunt has recently come under criticism. The rule considered most flawed is that debt as a percentage of GDP must have fallen by the fifth year of economic forecasts.

Not only is the rule based on long-term projections that are subject to change, it also means that some policies and programs will be halted to ensure debt levels fall in that final year, fueling frustrations over short-termism in economic policymaking.

The National Institute of Economic and Social Research “has long argued that the fiscal framework needs an overhaul,” said Stephen Millard, its deputy director. “By discouraging public investment, the current framework acts as a brake on growth.”

The chancellor clung to his rule.

According to the Office for Budget Responsibility, so-called underlying debt will rise over the next four years. But this will fall in the fifth and final year of the forecast, allowing Mr Hunt to stick to his budget line.

But “these predictions are based on budgetary fantasies,” said Michael Saunders, an economist at Oxford Economics and a former Bank of England interest rate setter. The forecasts call for an increase in fuel taxes, even though they have been frozen for 14 years and almost no one expects them to rise, he said. And they’re relying on “a painful squeeze on government spending,” he added, for which there is no “credible plan.”

What will happen to government spending?

The government has only detailed daily spending by department until March next year, with very little information after that.

The government has set some specific priorities: it will keep defense and foreign aid spending constant as a percentage of GDP, increase funding for childcare, provide more money to the NHS and leave spending on schools unchanged after adjusting for inflation.

But that means everything else – so-called unprotected government services, such as the courts, prisons and local authorities – will face steep cuts. According to the Office for Budget Responsibility, spending should fall by more than 2 percent a year after the election. Spending per person on public services would not grow over the next five years, adjusted for inflation, the watchdog said.

Economists have said such sharp cuts appear impossible due to the poor state of some public services.

The Resolution Foundation, a think tank, estimates that unprotected public services will face £19 billion in cuts after the election. The idea that will happen is a “fiscal fiction,” says Torsten Bell, CEO.

A challenge for the next government.

The tax cuts leave a difficult choice for whichever party wins the election: maintain existing spending plans and further cut public services, or find more money, which will likely mean a tax increase.

“Whoever is chancellor at the time of the next spending review,” said Paul Johnson, the director of the Institute for Fiscal Studies, “may wish he had chosen a different field.”