Chancellor Rishi Sunak has been branded a “fiscal illusionist” by a respected economic thinkthank, which found his tax cuts in Wednesday’s mini-budget “will not be enough to protect poorer households from a significant hit to their living standards”.
Institute for Fiscal Studies director Paul Johnson said that the apparent tax giveaways in Mr Sunak’s spring statement in fact amount to a “substantial takeaway” when earlier tax hikes are taken into account, with most workers paying more in the long run.
And he said that the chancellor’s refusal to increase benefits to match soaring inflation will leave many of the country’s poorest people worse off.
In a scathing analysis of Mr Sunak’s measures, Mr Johnson said that the increase to £12,570 in the threshold for paying National Insurance contributions (NICs) this July, coupled with a £9bn package of help with energy bills announced earlier, “is not enough to offset the fall in real earnings that we expect to see”.
An average earner on £27,500 a year will be about £360 worse off in the next financial year, while someone earning around £40,000 will be almost £800 worse off, he said.
Meanwhile, the failure to upgrade departmental spending in areas like health and education to reflect the expected surge in inflation to almost 9 per cent later this year will effectively mean “hefty real pay cuts across the public sector”.
And Mr Johnson said that the chances of Mr Sunak being able to restore fuel duty to the level set out in his long-term plans, with a 6p hike in 2023 to reverse the one-year 5p cut announced yesterday, were as great as his chances of winning the National Lottery, adding: “And I don’t play the lottery.”
The net effect of the measures announced by Mr Sunak on Wednesday amounts to a “relatively modest” giveaway to households struggling with a cost-of-living crisis of around £5bn in 2022-23, at a time when the Office for Budget Responsibility predicts the biggest one-year fall in living standards since the 1950s, said Mr Johnson.
Mr Johnson branded Sunak a “fiscal illusionist”, after the chancellor presented his spring statement the biggest tax cut for a quarter of a century, while actually delivering a package which will see overall taxes rises to their highest level since the era of rationing in the late 1940s.
The 1p cut in income tax announced by the chancellor for 2024, at a cost of £5bn to the Treasury, will hand back only half of the additional windfall Mr Sunak can expect from a previous decision to freeze thresholds for the basic and upper rates, he said.
“He told us that he cut taxes yesterday,” said the IFS director. “In a sense he did. He increased the floor for NICs and promised a cut in income tax in 2024.
“So Mr Sunak’s statement contained big new tax cuts. But it also allowed taxes to rise. He can now expect to raise more in tax as a share of national income by 2025 than he expected last October.
“In fact, taxes are set to rise to their highest level as a fraction of national income since Clement Attlee was prime minister.”
The chancellor’s illusion was achieved by leaving untouched the four-year freeze in income tax thresholds announced last year.
At the time the freeze was unveiled, low inflation meant that it delivered a relatively small but appreciable sum to the Exchequer. With inflation running out of control, and wages likely to keep pace to some extent, millions more workers than previously expected will be pulled into higher tax rates – and to pay income tax on a larger share of their income – in a phenomenon known as “fiscal drag”.
“The proposed cut in the basic rate gives back only about half of the additional windfall he is now expecting to enjoy from that measure,” said Mr Johnson.
“On current plans Mr Sunak’s income tax changes won’t actually depress income tax revenues in 2024/25. Despite the cut in the basic rate planned for that year, the income tax take will stay about the same as in the previous year, and then continue rising.
“That’s the effect of inflation and fiscal drag. They have magically doubled the scale of the tax rise he announced last year.”
Mr Johnson acknowledged that the chancellor was “caught in a bind” thanks to the triple blow to the economy from Brexit, Covid and the Ukraine war, along with the lingering after-effects of the 2008 financial crash.
Far from helping boost the UK’s prospects, as its proponents claimed, the evidence so far suggests that Brexit will have “a substantial long-term negative effect on our national income”, he said.
But Mr Johnson said the chancellor had taken decisions which failed to protect the poorest in society and had chosen almost simultaneously to raise NICs thresholds and cut income tax in a way which was “indefensible from an economic point of view”. And he pointedly concluded: “Other choices were available.”
”He has not taken the opportunity to protect the poorest more fully simply by uprating their benefits more closely in line with actual inflation,” said Mr Johnson.
“His choice to increase NI rates and reduce the basic rate of income tax looks indefensible from an economic point of view, though one can see the political attractions.
“He continues, despite his rhetoric, to be a chancellor presiding over a very big increase in the tax burden. What he did yesterday was not enough even to stop the expected tax burden rising yet further.
“He is sharing the inevitable pain of continued bad news between public services and taxpayers, with benefit recipients suffering in the short term. He had tough decisions to make. Other choices were available.”
