Is there room for the UK government to make tax cuts ahead of the election? While it’s a strategic political move, there are doubts about the feasibility of this step, given the financial landscape of the country. The Spectator considers the current economic situation and explore whether Rishi Sunak and team have the wiggle room they need.
The Current Tax Burden: What’s Going On?
Since taking office, the tax burden Rishi Sunak and Chancellor Jeremy Hunt introduced is projected to reach an unprecedented post-war peak by the time this Parliament concludes. Before battling it out with Labour in the upcoming election, they’re under pressure to ease the strain on taxpayers. The big question is, with the country’s current financial state, is this a viable move?
The latest update from the Office for National Statistics (ONS) sheds some light. In August, the public sector net borrowing was reported at £11.6 billion. Interestingly, while this is £3.5 billion higher than August of the previous year, it’s £1.4 billion under the Office for Budget Responsibility’s (OBR) recent prediction. Summing it up, since this fiscal year began, the Treasury’s borrowing is £11.4 billion less than anticipated by the OBR.
The Silver Lining: Rising Tax Receipts
A heartening observation comes from the fact that the government coffers are seeing more influx. Central government earnings in August amounted to £76.6 billion, surpassing forecasts by £1.2 billion. Diving into the details, tax collections reached £57.6 billion – a noticeable £2.7 billion leap from the August 2022 figures.
The surge in tax receipts might be indicative of the escalating tax burden, partly because of fiscal drag effects. When tax thresholds remain static, taxpayers could find themselves in a higher rate bracket. This situation, however, could provide the government the much-needed breathing room to entertain a tax-cutting strategy.
Considering Tax Cuts: What Are the Options?
So, if the government decides to go for a cut, where might they look? One potential candidate is the inheritance tax. Gaining attention recently, it’s perceived by some Tories as a prime candidate for reduction. Why? Not only is it among the least favoured taxes (being seen as ‘unfair’), but its modification could also galvanize the party’s grassroots, presenting a tax policy they’d likely rally behind. Notably, data shows that inheritance tax receipts surged this year, touching £3.2 billion between April and August, marking a £300 million increase compared to the same timeframe the previous year.
However, the rise in inheritance tax is partly attributed to frozen tax thresholds, pushing more individuals into the inheritance tax bracket. While some Tory MPs might champion the reform or even abolishing of this tax, there’s a counterargument. Some believe that any spare fiscal space should be used for broader-reaching tax cuts, such as the basic rate of income tax.
The Bigger Picture: Can We Afford Tax Cuts?
Before making a move, it’s essential to gauge the broader economic scenario. The latest fiscal data reveals that the government is borrowing less than what was earlier projected. However, the country’s deficit remains a concern, especially in the post-pandemic world. To add to this, public sector net debt is still on the rise, hitting £2.36 trillion in August. To give context, as a percentage of the debt, these figures echo the early 1960s levels. This once again underscores the unfeasibility of the government’s aspiration to reduce the debt: net debt seems to only be increasing.
The Bottom Line
Tax cuts, if they come, may result from borrowing marginally less rather than any significant alteration in public spending trends. This approach doesn’t perfectly align with the Prime Minister’s fresh slogan, which advocates for “Long-term decisions for a brighter future.” However, this might be the formula to locate an election-time tax cut.