With the general election at most 14 months away, the British government announced on Wednesday that it would cut taxes for millions of workers from early next year.
Jeremy Hunt, Britain’s top finance official, announced a series of measures designed to shake up the country’s stagnating economy by boosting business investment and pushing more people into the workforce. At the same time, his political party, the Conservatives, hopes the tax breaks will boost its electoral chances as it trails the opposition Labor Party by 20 points in polls.
National Insurance, a tax paid by employers and employees to fund state pensions and some benefits, will be cut by two percentage points to 10 percent for workers, Mr. Hunt said, saving the average worker about 450 pounds ($560) next year would. This tax is separate from other income taxes that have not changed.
The government will also extend tax relief for business investment and cut taxes for the self-employed, Mr Hunt said. Overall, the measures introduced on Wednesday would increase business investment by £20 billion a year, he said.
“Because of the difficult decisions we have made over the last year,” Mr. Hunt said in a speech to lawmakers in Parliament on Wednesday, inflation was slowing and government debt was lower than previously forecast. “I said we would cut taxes if we could, but only responsibly and only in a way that doesn’t fuel inflation,” he added.
In recent days, government officials, including Prime Minister Rishi Sunak, said the British economy had reached a turnaround that made tax cuts possible. Last week, data showed Britain’s inflation rate fell to 4.6 percent in October, and Mr Sunak declared a success on his promise to halve inflation this year.
But the country’s economic prospects remain weak. Although inflation hit its lowest level in two years, it was still more than double the Bank of England’s 2 percent target and higher than in the United States and Western Europe. The bank recently forecast that economic growth would remain stagnant through 2024 and 2025. At the same time, the country’s debt mountain is already about 98 percent of gross domestic product, the highest level since the 1960s, and the costs of servicing that debt have since risen from higher interest rates and rising prices.
In recent years, Britain’s public finances have been hit by the pandemic and £104 billion of support to households during the recent energy price shock. The government’s fiscal credibility has also been significantly damaged by the unfunded tax cuts during Liz Truss’ short time in office. When Mr Hunt was installed as Chancellor of the Exchequer a year ago, he was careful with the country’s money and abandoned almost all of Ms Truss’s plans. He said there was little room for spending increases and tax cuts.
Now, with the election in sight, Mr Hunt has found the money to offer some perks, such as lower taxes and even a freeze on alcohol duty. He is able to do this and still respect fiscal rules as government spending is expected to be constrained after 2025 and public investment is stagnating.
Because of this spending squeeze, “there is significant risk that these plans will prove unworkable and today’s tax cuts will prove unsustainable,” Paul Johnson, the director of the Institute for Fiscal Studies, said in a statement.
The Office for Budget Responsibility, which produces independent forecasts for the government, said Mr Hunt’s plan would cut debt levels to 94 percent of gross domestic product within five years, in line with Treasury rules.
The financial regulator also updated its economic and inflation forecasts. It was more optimistic about growth than the central bank, forecasting the economy would grow 0.7 percent next year, although that is much lower than the 1.8 percent growth the office forecast six months ago . Due to the impact of higher interest rates and more persistent inflation, forecasts for the following years have been lowered slightly.
Britain’s inflation rate would slow to 2.8 percent at the end of next year before reaching the central bank’s target in the first half of 2025, a year later than the regulator previously forecast.
For months the government has said tackling inflation is its top priority, and until recently there was little expectation of tax cuts in Wednesday’s financial statement. But Mr Sunak is trailing in the polls and is under pressure from his party’s right wing to cut taxes ahead of a general election due in January 2025.
This week, Mr Sunak signaled a change in focus, saying he had made “difficult decisions” on inflation, such as opposing big pay rises for striking public sector workers. “Now you can trust me when I say we can start cutting taxes responsibly,” he said.
While cutting Social Security might generate some positive headlines, few people are likely to feel significantly better. That’s because the freeze on thresholds for different income tax brackets, which Mr Sunak announced as chancellor, has resulted in people paying more tax as their wages rose in the recent period of hyperinflation. The Social Security cut offsets only about a quarter of the increase in tax burden caused by the frozen income tax limits, the Office for Budget Responsibility said Wednesday.
And so Britain’s tax revenue is expected to rise to 38 percent of gross domestic product, the highest tax burden since the Second World War, the regulator said. According to the Institute for Fiscal Studies, this parliament, which took office in 2019, will be the largest tax increase since comparable records began.
Several of Mr Hunt’s measures targeted some of the most persistent problems holding back the UK economy.
Its goal is to stimulate more business investment through permanent tax breaks for capital investments. Previously, companies could only write off 100 percent of their investments until 2026. The measure means that for every million pounds invested, companies will receive £250,000 off their tax bill. It is expected to cost the government around £9bn a year.
Mr Hunt called it the “biggest corporate tax cut in modern British history”.
Despite the government being accused of falling behind on funding its commitment to reducing greenhouse gas emissions and failing to adequately support infrastructure development, Mr Hunt announced plans to accelerate investment in clean energy and the green transition. He said he would take measures to speed up planning applications, enable connection to the electricity grid and provide compensation to people living near new pylons and substations.
Mr Hunt also said £4.5 billion would go to the manufacturing sector, particularly for clean energy and the automotive, aerospace and life sciences industries. However, the funds would only be available after 2025 or after the next election.
Before Wednesday’s statement, the Treasury had announced some measures to get more people into work. The number of Brits not in work has risen as long-term health conditions, including mental illness, increase.
Over 100,000 people become eligible for government benefits every year “without having to look for work due to illness or disability,” Mr Hunt said. “This waste of potential is economically wrong and morally wrong.”
A new measure would mean benefit recipients risk losing their payments if they do not show sufficient progress or commitment in finding work.
The government also announced an increase in the minimum hourly wage by almost 10 percent to £11.44 and said it would be extended to 21-year-olds.
Stephen Castle contributed reporting.