- Giveaways rely on post-election
plans for implausible austerity and growth-sapping investment
cuts
The Chancellor has spent almost all of the near £90 billion of
fiscal good news handed to him by the Office for Budget
Responsibility (OBR), mainly on tax cuts well-targeted at
investment and earnings. But these were funded by handing whoever
wins the next election implausible plans to cut public spending,
the Resolution Foundation said today (Wednesday) in response to
Autumn Statement 2023.
The Chancellor received a weak economic outlook from the OBR –
including falling household disposable incomes (-0.9 per cent in
2024) during an election year. However, surging tax revenues,
partly reflecting higher inflation, have delivered a pre-measures
improvement in public finances of £88.5 billion between 2023-24
and 2027-28.
The Chancellor has used this improvement to go early on
pre-election giveaways, with tax cuts worth £20 billion in
2028-29. This is the biggest tax reduction package since 1988
(Liz Truss’s announced but never implemented ones aside).
The 2p cut to the main rate of employee National Insurance (NI),
along with the 1p cut for self-employed workers and the abolition
of Class 2 NI, will give 29 million workers an average gain of
£330 next year, as well as a welcome reduction in the tax
incentive for higher earners to be self-employed.
However, these £10 billion of personal tax cuts are still dwarfed
by the £45 billion of already announced national insurance and
income tax rises. As a result, households will on average be
£1,200 worse off overall thanks to the changes announced in this
parliament. Only those earning around £11,000 to £13,000, and
£42,000 to £52,000, will be better off.
The Chancellor also made ‘full expensing’ for business investment
permanent, a welcome move that the OBR thinks will raise GDP in
the long term by 0.2 per cent, but could be much higher.
The overall picture is of rising taxes in the 2020s, even with
the £20 billion of total tax cuts announced today. Tax as a share
of GDP is still set to rise by 4.5 percentage points (or £4,300
per household) between 2019-20 and 2028-29 – the highest level in
80 years.
The Chancellor also announced a series of benefit changes that
will boost the incomes of renters ahead of the next election,
while cutting those of people with mobility challenges or
moderate mental ill health after it. Raising Local Housing
Allowances back in line with rents in April 2024 is welcome and
willboost the incomes of up to 1.6 million households next year,
while tightening the criteria for the Work Capability Assessment
from 2025 will see 371,000 people lose an average of £3,400 a
year by 2028-29.
The improved public finance forecasts that made significant tax
cuts possible reflect the fiscal fiction that the Chancellor can
bank the extra tax revenue from higher inflation, but make no
adjustment to public spending plans in light of higher prices.
Higher inflation has knocked £19 billion off total departmental
spending by 2027-28 compared to March plans, with unprotected
departments (including prisons and local government) facing cuts
of almost 9 per cent in their day-to-day spending between 2024-25
and 2028-29.
Capital spending is also set to fall by over a third as a share
of GDP between 2023-24 and 2028-29 – a cut equivalent to £20
billion – seriously undermining future growth prospects.
The scale of these cuts is implausibly large, says the
Foundation, but the Chancellor is relying on them to fund his
pre-election tax cuts and maintain fiscal headroom of £13 billion
against his debt rule. This headroom remains far too low, half
the average level of headroom since 2010 of £27 billion.
Torsten Bell, Chief Executive at the Resolution
Foundation, said:
“Today the Chancellor used an inflation-driven surge in tax
receipts to go early on pre-election giveaways – announcing the
biggest package of tax cuts since 1988. In doing so, the
Chancellor has rightly prioritised workers’ earnings and firms’
investment plans. Raising the Local Housing Allowance will also
help 1.6 million households struggling with surging rents.
“But the truth is taxes are up not down. Today’s cuts are dwarfed
by tax rises already underway. By the end of this decade taxes
are set to be up by the equivalent of £4,300 per household
compared to 2019.
“Worse, the giveaways announced today are funded by handing
whoever wins the next election implausibly large spending cuts.
Tax cuts to boost business investment are welcome, but undermined
by plans to cut public investment by over a third – it’s hard to
think of a more anti-growth policy.”
