Save, make, understand money


‘Weak economic case’ for big tax cuts in Budget

‘Weak economic case’ for big tax cuts in Budget
Anna Sagar
Written By:
Anna Sagar

There is only a “weak economic case” for sizeable tax cuts in next week’s Budget due to higher debt interest spending, a report has said.

Research from the Institute for Fiscal Studies (IFS) suggested the fiscal outlook has changed since November, with the outlook for spending on debt interest improving slightly, and it was not on track to fall in five years’ time as expected.

It explained that debt interest spending was forecast to be £10bn less in 2028 to 2029 than was expected in the Autumn Statement, which some argue could offer “additional headroom”.

However, the IFS said that high debt interest spending was a “big constraint”, adding that it would expect it to be at 2% of national income, or £55bn per year, above what was forecast pre-pandemic.

It explained: “The fact remains that public sector net debt will barely be on course to fall in five years’ time, and only on the basis of plans for fuel duties, business rates and, in particular, day-to-day spending on public services that are unlikely to be realised. There is therefore only a weak economic case for another sizeable net tax cut in the forthcoming Budget.”

The report explained that the Chancellor’s fiscal rule to get debt falling in the fifth year of the forecast period was “commendable”, but a “badly designed rule”.

“The Chancellor appears to be gaming his own fiscal rule. By pencilling in unspecified spending cuts towards the end of the period, he appears to meet the rule, but he is doing so in a way that will lack credibility and transparency until he tells us where he intends to find those cuts,” it noted.

Martin Mikloš, research economist at IFS and author of the report, said: “In November’s Autumn Statement, the Chancellor ignored the impacts of higher inflation on public service budgets and instead used additional tax revenues to fund eye-catching tax cuts.

“At next week’s Budget, he might be tempted to try a similar trick, this time banking the higher revenues that come from a larger population while ignoring the additional pressures that a larger population will place on the NHS, local Government and other services.”

He added: “He might even be tempted to cut back provisional spending plans for the next Parliament further to create additional space for tax cuts.

“The Chancellor should resist this temptation. Until the Government is willing to provide more detail on its spending plans in a Spending Review, it should refrain from providing detail on tax cuts.”

Population growth will lower per-person spending

The report warned that faster population growth, as predicted by the Office for National Statistics (ONS) in January, could “boost revenues” but make keeping existing spending plans more challenging.

Under the updated projections, per-person spending will come to 0.2% per year, which is down from 0.5% in the Chancellor’s forecast in November.

The IFS said that, in order to maintain spending on “unprotected services”, a cash top-up of £20bn would be needed, and to keep per-person spending, an additional £25bn would be required.

The think tank added that lowering the planned growth rate in overall public service spending from 0.9% to 0.75%, which the Chancellor is rumoured to be considering, would add £3bn to cuts to “unprotected areas.”

Tax cuts without reform would be ‘missed opportunity’

The IFS said that “tax cuts without tax reform would represent another missed opportunity”.

It explained: “If the Chancellor is determined to cut taxes and wants to boost growth, then better options exist than simply cutting the rates of income tax, National Insurance contributions or inheritance tax.”

The IFS added that stamp duties on the purchase of properties and shares were “particularly damaging taxes” and should be “towards the front of the queue for growth-friendly tax cuts”.

The report added that taxes in 2023 to 2024 would be £66bn higher than they would have been if their share of national income had stayed at pre-pandemic levels.

“Whatever cuts may be announced in the Budget, we are still likely to see taxes rise by a record-breaking amount over this Parliament,” the IFS said.

Related: The latest Budget rumours, requests and potential ‘rabbits’