Lower interest rates will increase the chancellor’s fiscal headroom for election year tax cuts but UK households will struggle to see much improvement as these will be sandwiched between far bigger past and future tax rises.
Think tank the Resolution Foundation said that falling interest rates will increase the size of the fiscal headroom against the government’s “falling debt” fiscal rule from £13bn to £23bn.
Chancellor Jeremy Hunt is considering making billions of pounds of spending cuts to fund pre-election tax cuts in the next budget, according to the FT.
The planned 5p increase to fuel duty planned for 23 March will be scrapped or postponed at a cost of £2bn next year, while cutting the basic rate of income tax by 1p or cancelling the personal allowance freeze in 2024-25 would both cost £7bn each, according to the think tank.
A “cheaper option” would be cutting employee national insurance again by 1p, at a cost of £5bn.
Read more: Bank of England could cut interest rates before inflation hits 2%, Bailey says
Other options include raising the child benefit withdrawal threshold from £50,000 to £70,000 (costing £2bn) or abolishing it altogether (costing £4bn).
The Resolution Foundation, however, noted that cutting the basic rate of income tax by 1p while maintaining the personal allowance freeze next year would mean anyone earning less than £38,000 would see their personal tax bills rise rather than fall.
Whatever tax cuts UK households secure ahead of the general elections, the think tank warns that Britain is really being offered a “tax sandwich”, with these tax cuts sitting between significant past and future tax rises.
Tax rises of around £20bn were introduced in 2023-24, including freezing personal tax thresholds and increasing corporation tax.
The government has also pre-announced major tax rises for after the next election, with a further £17bn of tax rises set to come into effect in the next parliament, including a Spring 2025 stamp duty rise and three extra years of tax threshold freezes.
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“History, and significant spending cuts pencilled in for after the election, tell us that further tax rises may well be announced after polling day — as we saw in 1993, 1998, 2011, 2016 and 2020,” the Resolution Foundation, said.
The think tank said that the idea that fresh tax cuts are affordable rests on “fiscal fictions”, for example that high inflation and a much bigger population will not lead to additional public service spending.
James Smith, research director at the Resolution Foundation, said: “The chancellor may see some small improvements to the outlook for the public finances ahead of his March Budget. He and the prime minister have made it clear they’ll spend any improvement on pre-election tax cuts.
“But what Britain is being offered is really a ‘tax sandwich’. Juicy tax cuts in this election year are sandwiched between far bigger tax rises already introduced last year. And highly unusually the government has already announced plans for a chunky package of tax rises that will come into effect after polling day.
“History also tells us those future tax rises will be even bigger, as governments tend to hike taxes early in a new parliament. Implausibly large cuts to public services that are pencilled in for after the election mean history may well be about to repeat itself.”
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The think tank added that “the biggest fiscal fiction” is that post-election plans for day-to-day public service spending to rise by just 1% in real terms will be delivered.
Given protections for the NHS, defence and education, that would require real per-capita spending cuts of around 17% for unprotected departments like the home office, justice and local government by 2028-29, the Resolution Foundation said.
“Avoiding those cuts would require £30bn of extra spending, while media speculation that further headroom for tax cuts could be generated by further cutting spending growth from around 1% to 0.75% would mean some public services having their spending power cut by around a fifth over the next parliament,” it added.
The chancellor will present his Spring budget 2024 to parliament on Wednesday 6 March 2024.
Watch: UK economy slides into recession ahead of election
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