Tory tax cuts: a 'fiscal drag' race?

Jeremy Hunt announced a cut to national insurance this week in an Autumn Statement geared to boosting long-term economic growth.

The two-percentage-point reduction will benefit 27 million workers and will start in January. The Chancellor also permanently extended the "full expensing" scheme that allows companies to claim back 25p for every £1 they invest in IT, machinery and equipment. Claiming it was worth more than £10bn a year, he called it the "biggest business tax cut in modern British history". 

He also announced reforms to planning rules, pensions, the minimum wage and savings accounts, as well as welfare reforms to get more people back into paid work. 

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'Return to low-tax, small-state conservatism'

The Autumn Statement was one of the last chances for the Tories to shift public opinion before the next election, said the Daily Mail. The Chancellor was right to focus on growth and signal the "return to low-tax, small-state conservatism". This shift was overdue, said The Sun. The party's image as the guardian of the small state has been hammered in recent years. A poll last weekend suggested more people now regard Labour, rather than the Conservatives, as the party of low taxes.

The fact that the Treasury has a bit more money to play with than it expected has granted the Tories a convenient cover for tax cuts, said The Independent. The £6.5bn fiscal headroom predicted in March has become £27bn, because persistent inflation has increased the tax take. The flipside, though, is that inflation has also pushed up the cost of running public services, so it’s not really the right time for tax cuts. As for Hunt's plan to deny free NHS prescriptions to benefit claimants who fail to show that they’re actively seeking work, that's "gesture politics of the worst kind". But the Tories do need to do something about the huge rise in working-age people claiming sickness benefits since the pandemic, said The Times. "At more than two million, this is unsustainable."

Hunt has changed his tune, said Kate Andrews in The Spectator. Only last month, he told Tory Party members that the Treasury was in no position to talk about personal tax cuts, "or even to ask 'what if'". That the Chancellor has decided that he can, after all, offer taxpayers a modicum of relief will prompt accusations of irresponsibility from the usual suspects, said Mark Wallace in The i Paper. But there’s nothing reckless or dogmatic about the move. Our tax burden is at the highest level on record: "every government in the past 70 years has thought it right and appropriate to tax less" than the Tories are doing now.

'Fiscal drag'

These cuts may return a little money to taxpayers, said Johanna Noble in The Times, but the Tories are collecting far more through the insidious mechanism known as "fiscal drag". Tax thresholds usually rise in line with inflation, but Sunak froze them in 2021, and they’re set to remain frozen until 2028. This is dragging ever more earners into higher tax bands. In the 1991-92 tax year, only 3.5% of taxpayers paid 40% tax (or above). By 2028, some 14% of taxpayers will. The Office for Budget Responsibility (OBR) estimates that the threshold freezes will raise a combined £44.6bn in extra revenue by 2028-29. Hunt's cuts are small beer in the context of this "stealth tax", said Jeremy Warner in The Daily Telegraph, but at least he is trying to distinguish the Conservatives from Labour. We are "starting to see a proper choice".

Hunt is moving in the right direction in some respects, said Will Hutton in The Observer. Allowing firms to offset investment against corporation tax permanently is a good idea. "This is the only 'tax cut' that has ever been proven to raise investment." Simplifying pension funds also makes sense. But the money given away in personal tax cuts should have been invested in our crumbling public services or used to bolster our "ruinously weak" public finances. As far as Hunt is concerned, these are problems that can be put off until after the election, said Larry Elliott in The Guardian. "He can come up with tax cuts and implausibly tough plans for public spending, knowing that someone else will have to deal with the consequences."