- By Lucy Hooker
- Business Reporter, BBC News
February 27, 2024, 00:01 GMT
Updated 56 minutes ago
Image source: Getty Images
The government should not cut taxes in the next budget unless it can show how it will afford them, a leading think tank has warned.
The Chancellor has indicated he wants to cut taxes in what could be his last budget before a general election.
But the Institute for Fiscal Studies (IFS) said the case for tax cuts was “weak”.
The government said it would not comment on whether further tax cuts would be “affordable in the budget”.
But both Jeremy Hunt and Rishi Sunak have made it clear that they want to reduce the public tax burden. Last month Chancellor Hunt indicated he was considering cutting public spending to deliver tax cuts.
However, the IFS said the chancellor should not proceed with this without providing specific details about where the ax would fall.
Any tax cuts “should wait” until the Chancellor can carry out a detailed spending review, the think tank said.
“We do not believe we should implement specific tax cuts now that will essentially be paid for by uncertain spending cuts that may never be implemented,” said Carl Emmerson, deputy director of the IFS.
The IFS said taxes in the UK would reach record levels relative to the size of the wider economy. However, national debt is also high and rising and “hardly on track” to fall in five years – one of the government’s self-imposed rules.
Furthermore, even this “unfavorable outlook” for public finances was based on spending cuts and tax increases, including an increase in fuel tariffs and changes to business tax rates, which were “unlikely to be implemented,” the IFS said.
“There is therefore only a weak economic case for a further significant net tax cut in the coming budget,” the IFS wrote in its report published on Tuesday, ahead of the budget release on March 6.
The IFS said if Mr Hunt actually wants to cut taxes, he should consider reforming stamp duty on purchases of property or shares, rather than cutting income tax or further cutting national insurance rates, which were cut in January.
Mr. Emmerson acknowledged that tax cuts can help spur economic growth, but said: “That doesn't mean the tax cuts will pay for themselves.”
“There are many problems in our tax system – we need real tax reform – and if we want pro-growth tax cuts we should look at stamp duty on property purchases and stamp duty on share purchases,” he told the BBC's Today Program.
“They are very damaging taxes and cutting them would be better for growth than, say, cutting the main rate of Social Security.”
According to a report in The Times, the Chancellor will opt for a 1% cut in workers' national insurance, which would cost £4.5 billion a year, and keep fuel duty frozen.
It also claims that the Treasury Department will tax e-cigarettes, particularly the nicotine-based liquid used in the devices.
However, to encourage adult smokers to switch to e-cigarettes, Mr Hunt would simultaneously increase tobacco taxes. This would be in addition to a 2% tobacco tax increase announced in last November's Autumn Statement.
Budgets for the NHS, schools, defense and foreign aid are earmarked, but the IFS said vulnerable areas such as the justice system and local government would experience greater shortages as a result.
After years of shrinking budgets, municipalities are already struggling with their own debts. Several of these have effectively gone bankrupt, including Birmingham City Council, Nottingham, Thurrock and Woking.
The IFS said its calculations suggest the Chancellor will need to find a further £25 billion to keep real spending per person on these unprotected services at current levels, alongside “plausible” arrangements for the NHS, childcare and other commitments .
The proposal for tax cuts has drawn criticism from others. Last month the Office for Budget Responsibility (OBR) described the government's “set” post-election spending plans as “fiction”.
But there is additional political pressure on the decisions the Chancellor will make next month. This budget could be his last chance to announce major policy changes before the general election due in January next year.
The government is expected to borrow £113 billion this year, £11 billion less than forecast in November, the IFS calculated, but still twice as much as before the pandemic.
The IFS warned that any additional “room” in the budget would be partly due to falling bills for interest payments on government debt, an element that remains “highly volatile”.
In response to the IFS report, the Treasury said it was normal for governments to set out comprehensive spending plans and more detailed departmental budgets would be set in the usual way at the next spending review.
A Treasury spokesman said: “We are on track to meet our budget rules and total departmental spending by 2028/29 will be £85 billion higher, adjusted for inflation, than at the start of this Parliament, including record funding for the NHS.”
“Thanks to our responsible approach to public finances, we were able to reduce taxes for employees and companies in the autumn declaration,” it said.