Amid a bleak 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 Treasury official, told lawmakers on Wednesday that he would cut National Insurance, a payroll tax paid by workers and employers to fund state pensions and some welfare benefits, by two percentage points. That would drop the rate to 8 percent for around 27 million workers, following 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 has also been reduced for the self-employed. Both changes will come into effect at the beginning of April.
“We can now help families not just through temporary cost of living support, but also through permanent tax cuts,” Chancellor Hunt told Parliament. “We are doing this to provide much-needed help in difficult times. But also because the conservatives know that lower taxes mean higher growth.”
Mr Hunt also announced a series of smaller measures, including a freeze on taxes on alcohol and fuel, proposals to boost productivity in the public sector and the removal of foreign income tax benefits for British residents whose permanent residence is abroad.
The chancellor has been under political pressure from the ruling Conservative Party to cut taxes ahead of a general election expected to take place this year, but a date has not yet been set. The party is well behind the opposition Labor Party in the polls.
But Mr Hunt's ability to offer voters something sweet has been limited by the fact that Britain's economy is growing slowly, if at all. Overstretched public services need money and there are calls to invest more in infrastructure. In addition, the Chancellor must adhere to his self-imposed budget rules, which leave him even less fiscal room for maneuver.
By cutting some taxes, the Conservative Party hopes to change the narrative that the end of its 14-year government term was marked by tax increases. But due to income tax freezes and other measures, the tax burden, as measured by tax revenue as a percentage of gross domestic product, is expected to rise to its highest level since World War II. A cut in income tax, a broader tax, has reportedly been ruled out due to concerns about the cost of such a gift and the risk it would increase inflation.
Still, there is a feeling among economists and other analysts that this budget will weigh on the next government – likely to be led by Labor if the polls are right – by cutting taxes today and leaving many departments with less money after the election leaves.
According to economists at the Institute for Fiscal Studies, it appears “infernally difficult to implement the post-election spending cuts.”
The Conservative Party is fighting for its electoral future against a relentless economic backdrop. Even though inflation has fallen from double-digit highs to 4 percent, the Bank of England is wary of cutting interest rates too soon. Meanwhile, businesses are failing at a rapid pace and voters want measures to reduce the high cost of living.
The British economy ended in recession last year. Growth is expected to be 0.8 percent this year and 1.9 percent in 2025, according to the Office for Budget Responsibility, an independent financial 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 strain 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 after spending heavily during the pandemic and supporting households through an energy crisis triggered by Russia's invasion of Ukraine and the shutdown of a key natural gas source. Last month, the French government announced 10 billion euros ($10.9 billion) in spending cuts.
On Wednesday, Mr Hunt said he would keep daily government spending growth adjusted for inflation at 1 per cent over the next five years. And instead of increasing those budgets, the money would be spent “better,” he said, listing proposals to use technology, including artificial intelligence, to increase productivity in health care, policing and the courts.
The British government has previously stated that it would keep the share of defense spending in national income constant. Mr Hunt has outlined a significant increase in funding for childcare, money for the National Health Service and a commitment to keep spending on schools unchanged after adjusting for inflation. This means other government departments such as courts, prisons and local governments may face significant cuts. High inflation has also undermined the effectiveness of previous spending plans.
This puts the next government in trouble. To maintain the tax cuts and maintain existing spending commitments, the next government would have to allow these other spending cuts, even as voters demand more investment in public services. Or the next government would have to increase taxes, something none of the major political parties want to propose before an election.
But the outlook can change. If the economy grows more strongly or productivity increases, government finances could develop more favorably. To encourage this, Mr Hunt stressed that his plans, including cuts to National Insurance, would encourage people to return to work. There are reportedly 700,000 more Brits unemployed today than before the pandemic.
Part of the tax cuts will be financed by changing the tax treatment of foreign income for so-called “non-domiciled residents”, i.e. people whose permanent residence is outside the UK. It would raise £2.7 billion annually by 2029, Mr Hunt said.
The change poses a challenge to the Labor Party, which had planned to revoke non-dom status to raise money to fund some of its election promises, such as NHS recruitment and an expanded school breakfast service.
The change to the non-dom rules brings in “money that the opposing party wanted to use for spending increases,” Mr Hunt said. “But today a Conservative government is making a different choice. We use this revenue to reduce taxes for working families.”
Labor Party leader Keir Starmer said the government was asking Britons to “pay more and more for less and less”.
He added that “after years of resistance, it was a desperate move to finally accept Labour's arguments on the non-dom tax rate.” And so: “If they sincerely support this policy now, then today they must answer the question: why Didn’t they do it before?”