Britain will cut taxes again as the elections approach
Amid a lackluster outlook for economic growth, the British government announced it would cut taxes for workers ahead of this year’s general election.
Jeremy Hunt, Britain’s top financial official, told lawmakers on Wednesday that he would cut National Insurance, a payroll tax paid by workers and employers that funds state pensions and some benefits, by two percentage points. It would reduce the rate to 8 percent for about 27 million workers, and follows a two percentage point cut announced less than four months ago. Together, the cuts would save the average worker about 900 pounds ($1,145) a year, Mr Hunt said. The rate was also reduced for the self-employed.
“We can now help families not just with temporary support for living costs, but also with permanent tax cuts,” Mr Hunt, the Chancellor of the Exchequer, said in Parliament. “We do this to provide much-needed assistance during difficult times. But also because the Conservatives know that lower taxes mean higher growth.”
Mr Hunt also announced a series of smaller measures, including freezing taxes on alcohol and fuel, proposals to boost productivity in the public sector and abolishing tax breaks on foreign income for British residents living abroad.
The chancellor is under political pressure from the ruling Conservative Party to cut taxes ahead of the general election, expected to take place this year, although no date has yet been set. The party is significantly behind the opposition Labor party in the polls.
But Mr Hunt’s ability to offer voters sweet treats is limited by the fact that the British economy is growing slowly – if at all. Overburdened public services need money and there are calls for more investment in infrastructure. The chancellor must also comply with his self-imposed budgetary rules, which leaves him with even less room for budgetary maneuver.
By cutting some taxes, the Conservative Party hopes to change the narrative that the government’s late 14 years were dominated by tax increases. But because of the income tax freeze and other measures, the tax burden, measured by tax revenues as a percentage of gross domestic product, will rise to the highest level since World War II. Cutting the income tax, a tax with a broader base, was reportedly ruled out due to concerns about the cost of such a giveaway and the risk it would increase inflation.
Yet there is a feeling among economists and other analysts that this budget will hamper the next government – likely to be led by Labor if the polls confirm – by introducing tax cuts today and leaving less money available for many ministries after the election.
The Conservative Party is fighting for its electoral future against a brutal economic backdrop. Although inflation has fallen from double figures to 4 percent, the Bank of England is wary of cutting interest rates too quickly. Meanwhile, companies are going bankrupt at a rapid pace and voters say they want measures that can help alleviate the high cost of living.
The British economy ended in recession last year. The economy is expected to grow 0.8 percent this year and 1.9 percent in 2025, according to the Office for Budget Responsibility, an independent budget watchdog.
“Because we have turned the corner on inflation, we will soon turn the corner on growth,” Mr Hunt said.
Budgets across Europe are under pressure as economies feel the pressure of higher interest rates and the need to spend more on defense and invest more aggressively in the green transition. At the same time, officials are trying to reduce debt levels after spending heavily during the pandemic and supporting households during an energy crisis after Russia’s invasion of Ukraine led to the shutdown of a key natural gas source. Last month, the French government announced 10 billion euros in cuts.
On Wednesday, Mr Hunt said he would keep daily spending growth at 1 per cent over the next five years, adjusted for inflation. And rather than increasing those budgets by more, the money would be spent “better,” he said, listing proposals to use technology, including artificial intelligence, to boost productivity in health care, the police and the courts .
The British government has previously said it will keep defense spending as a percentage of national income constant. Mr Hunt has outlined a big increase in childcare funding, money for the National Health Service and a pledge to keep spending on schools flat after adjusting for inflation. This leaves other government departments, such as the courts, prisons and local government, facing potentially significant cuts. High inflation has also eroded the strength of previous spending plans.
This places the next government in a difficult position. To maintain tax cuts and maintain existing spending commitments, the next administration would have to allow these other cuts to continue, despite voters calling for more investment in public services. Or the next government would have to raise taxes, something none of the main political parties are willing to propose before the elections.
But the outlook could change. If the economy grows faster or productivity increases, public finances may become more favorable. To promote this, Mr Hunt stressed that his plans, including the National Insurance cut, would encourage people to return to work. There are reportedly 700,000 more people economically inactive than before the pandemic.
Some of the tax cuts will be funded by a change in the tax treatment of foreign income for so-called non-domiciled residents, people whose permanent home is outside Britain. It would generate £2.7 billion a year by 2029, Mr Hunt said.
The change creates a challenge for the Labor Party, who planned to revoke ‘non-doms’ status to raise money to fund some of their election promises, such as the recruitment of NHS staff and a extensive school breakfast service.
Changing the non-dom rules “generates money that the opposing party wanted to use for spending increases,” Hunt said. “But today a conservative government makes a different choice. We use that revenue to lower taxes for working families.”