Income tax cuts are the Holy Grail of Britain’s Conservative Party, the electoral fuel that its MPs covet to boost the party’s flagging hopes at this year’s upcoming general election.
The issue hangs in the air at every gathering of the party’s right wing stalwarts – former prime minister Liz Truss sometimes holds mini rallies in central London focused entirely on the idea of cutting taxes. She filled a former church on Marsham Street last month with fearful Tories who were virtually praying for such a fiscal miracle to deliver them from the evil of losing marginal seats.
So when chancellor of the exchequer Jeremy Hunt stood up in the House of Commons chamber on Wednesday to deliver what will be his final spring budget before Britain goes to the polls, some were still wondering if he might pull an unexpected rabbit from a hat.
It seemed a long shot. Hunt’s main budget measure of a 2p cut in the national insurance rate, which will cost up to £10 billion (€11.7 billion), had been already well flagged in previous days. Without deeper cuts in floundering public services to fund a cut in income tax, he appeared not to have the cash for it.
So it proved. It became apparent that the cautious, low-key Hunt wasn’t going to deliver the early election present so craved by his backbench colleagues when he said Britain is still only “on a path” to lowering income taxes. The national insurance reduction, which helped workers but did not apply to other forms of income, would be his only sop to those who wanted him to swing the axe.
“Conservatives know lower taxes bring higher growth,” said Hunt. At this point, the house erupted on all sides as opposition MPs shouted about the UK’s record tax burden under the Tory government, while Conservative backbenchers, who may have privately sided with them, shouted back.
Deputy speaker Eleanor Laing pleaded for quiet so the budget speech could be heard: “The chancellor has hardly said anything,” she said. Cue uproarious laughter from all sides, as many MPs appeared to agree that she was exactly right: Hunt had not said anything of much substance at all.
The realisation has dawned in Britain over the last year that the nation is in a proper fiscal bind. Following the pandemic and the energy shock caused by the Ukraine war, it is left with the highest tax burden since the second World War. Its national debt is stuck at historically high-levels: around 90 per cent of GDP and rising – Britain’s highest debt levels in about 60 years.
It has also since last year been splashing about in a shallow recession, although the Office of Budget Responsibility (OBR) has forecast anaemic growth of 0.8 per cent is still on the cards for 2024.
To deliver significant tax cuts to fuel growth Hunt would have needed – not his ministerial red box – but a magician’s cape and wand. Even Wednesday’s modest national insurance cut, which will save the average British worker £450 per year, has left the chancellor with just a paltry £9 billion of fiscal headroom left in his rainy-day fund, according to the OBR.
The last time the governmental baton was handed over between the main parties in 2010, the outgoing Labour chief secretary to the Treasury, Liam Byrne, famously left a note for his Tory successor saying simply: “I’m afraid there is no money.” If, as expected, the handover goes the other way after the election later this year, that solemn sentiment surely will be returned with interest.
The world’s next Silicon Valley?
According to Torsten Bell, chief executive of the economic think tank the Resolution Foundation, the modest changes announced by Hunt on Wednesday still represented a “staggering reversal” of the approach favoured by his Tory predecessors since 2010. While small, the impact of the national insurance cut will be felt far more by younger workers, with no benefit at all for the wealthy retirees who are among the Conservatives’ core voters.
When Hunt first took over amid the turmoil of the fiscal near-implosion that happened under Truss, he froze tax bands to boost the Treasury’s coffers. The effect of this kicked in as wage growth in the UK peaked at 8.5 per cent last summer, and the country grappled with some of the stickiest inflation in Europe and galloping mortgage rates. Even on budget day this week, supermarket chain Co-Op said it had been forced to raise wages by more than 10 per cent.
As workers got pay rises over the last year and trundled over the frozen band thresholds, the tax they paid automatically rose without Hunt having to lift a finger on income tax rates. Wealthier, older people with income from various sources, including property lets and large pensions, were also affected by the squeeze on bands. But the national insurance cut only affects wages, and not the passive forms of investment income favoured by these richer Britons.
“The biggest choice Hunt made [on Wednesday] was to cut taxes for younger workers, while allowing taxes to rise for eight million pensioners,” said Bell, a former adviser to one-time Labour leader Ed Miliband. But, he added, there was still a sting in the tail. It is unclear exactly who will pay the bill.
“The tax [national insurance] cuts that were announced ... to sweeten the government’s election pitch rely on the prospect of a sour £19 billion of post-election tax rises, and the fiscal fiction that another £19 billion of cuts to public services can be delivered in a spending review that the Treasury has confirmed will not take place until after polling day.”
A multitude of opinion polls over the last 12 months have shown that, after the cost living, the biggest issue for Britons as they prepare to vote is the dire state of public services such as the National Health Service – there are year-long waits in some areas just to sign up for an NHS dentist.
With £19 billion of Hunt’s fiscal measures already effectively unfunded, there was little else he could do on tax without causing uproar by slashing services to the bone to pay for it. Despite the average £450 fall from the change national insurance, Bell said the “big picture” on tax is unchanged.
“Britain remains a country where taxes are heading up not down – rising by the equivalent of £3,900 per household – and where incomes are set to remain below their level at the last general election when voters return to the polls,” he said.
Business groups were mostly resigned to the fiscal tightrope that it was accepted Hunt had to walk on Wednesday, with little clamouring for the tax cuts and other pro-business measures that might otherwise have been on the agenda.
The Confederation of British Industry, which had a near-death experience in 2022 with allegations of improper behaviour among senior staff, acknowledged the chancellor’s “tricky high-wire balancing act”.
Shevaun Haviland, the director general of the British Chambers of Commerce, said the budget would not “shift the dial” for businesses.
“Business confidence is improving but the coming months will remain challenging for many companies. It is vital that the economy remains front and centre of the general election campaign to come,” she said.
The national insurance cut is expected to be enough to nudge up to 200,000 unemployed Britons back to the workforce, as the country wrestles with a crippling post-Brexit labour shortage. In recent years it has plugged the gap with foreign workers – net legal migration into Britain hit a record 745,000 in 2022, which has fed political upheaval over the issue and undermined a large part of the Brexit agenda, which was supposed to be about a desire to regain control of the country’s borders.
To square the circle, the Tory government has set out an aspiration to shunt the British economy up the value chain, where fewer but better workers would be the order of the day. Hunt said on Wednesday that he wanted the economy to be “high wage, high skill, and not based on migration”.
With fortuitous timing, the drug company AstraZeneca on Wednesday nipped in with an announcement that chimed perfectly to get a mention in the chancellor’s speech. It will invest £650 million in a manufacturing facility in Cambridge and a new vaccines hub in Speke, near Liverpool.
“I have long believed we should be manufacturing medicines as well as developing them,” said Hunt, which should pique the interest of IDA Ireland officials who have long sold the Republic as the home-from-home in western Europe of the globe’s biggest pharmaceutical companies.
In another echo of the Republic’s investment and growth strategies, Hunt lauded the UK’s potential as a tech hub. He said Britain has double the number of artificial intelligence start ups of anywhere else in Europe – prime minister Rishi Sunak hosted a big AI conference just last November in Bletchley Park (where the UK famously cracked Nazi secret codes during the second World War)
Hunt insisted Britain had double the venture capital investment of other European countries, and a tech economy double the size of Germany’s and three times the size of the one in France.
“We are on track to become the world’s next Silicon Valley,” Hunt insisted.
Regardless of how much he hammed up Britain’s growth prospects, figures released by the OBR still showed that the sort of rocket-fuelled expansion that has driven the Republic to greater prosperity looks set to remain elusive for Britain for several years to come.
Britain is on course to crawl out of recession this year with the growth of 0.8 per cent, followed by 1.9 per cent in 2025 and an average of 1.8 per cent in the three years after this, according to the OBR’s data.
“In this it remains much more optimistic than the Bank of England about the underlying strength of the economy,” said the Institute for Government, a think tank that scrutinises public policy.
As far as its economy and business environment goes, the drive to make Britain great again still has a long way left to go.
- Sign up for Business push alerts and have the best news, analysis and comment delivered directly to your phone
- Find The Irish Times on WhatsApp and stay up to date
- Our Inside Business podcast is published weekly – Find the latest episode here
