Chancellor Jeremy Hunt cut personal and business taxes by £20bn as part of his Autumn Statement aimed to boost growth. However, the UK’s Budget Watchdog warned that taxes in general are still increasing at a high post-war level.
The independent Office for Budget Responsibility slammed Hunt’s fiscal plans, saying they would only provide a “modest” boost to the economy and that the tax burden would increase for each of next five years.
In a statement that was largely political on Wednesday, Hunter announced he would reduce the main rate of insurance from 10% to 10% starting January 6, the beginning of an expected election year. The cost is estimated at £9bn.
The chancellor also made permanent the capital allowance system of “full expense” at a cost of PS11bn. He described this as the “largest business tax reduction in modern British History”.
The timing of national insurance cuts, which will benefit 27mn workers, has sparked speculation that the government is considering a general election in spring if its poor opinion poll ratings improve.
The OBR stated that the tax reductions were dwarfed in comparison to the impact of the government freezing tax thresholds from 2022-23 until 2028-29. It said that nearly 4mn people would pay income tax for first time, and 3mn would be moving up to a higher rate.
The fiscal watchdog stated that “while personal and business taxes are cut by half a point, the tax burden still increases in each of the five following years to an all-time high of 38% of GDP.”
Rachel Reeves (shadow chancellor) accused the government for presiding over tax increases that were record highs due to “fiscal lag”, but Labour did not commit itself to oppose any of Hunt’s policy measures. The Liberal Democrat leader Sir Ed Davey called the Autumn Statement a “hoax”.
The OBR has also cut its economic growth forecast and warned that Autumn statement will only provide “a modest increase in output of 0.3% over five years”.
OBR reported that the chancellor chose to keep government departmental expenditures “broadly unchanged”. This meant that borrowings were reduced by £27bn, but budgets remained squeezed.
Hunt said that he would establish a new goal to keep the growth of public spending below the overall growth in economic activity “while protecting services”.
Hunt said that with the OBR showing debt on a sustainable trajectory and inflation at 4.6 percent, it was now time to let go of the fiscal brake.
The chancellor stated that “our plan for the British Economy is working, but the work isn’t done.” He then listed 110 supply-side initiatives, designed to increase business, get sick people back to work, and bring more capital into the economy.
Full expensing capital investments, which were due to expire by 2026, allowed a company immediately to deduct from its taxable profit all expenditures on IT equipment, plants or machinery. Business groups were keen to extend the full expensing of capital investment, which was due to expire in 2026. This allowed a company immediately deduct all its expenditure on IT equipment, plant or machinery from taxable profits.
The chancellor stated that the measures will increase business investment by approximately PS20bn per year in the economy within a decade. This is “a decisive move towards closing the gap between productivity and other major economies”.
The OBR stated that it expects the economy to grow by 0.6 percent this year, and 0.7 percent next year. The watchdog had previously forecast a 0.2% contraction for this year, and a 1.8% growth in 2024. The Bank of England predicts that growth will remain flat in 2019.
The chancellor announced that the state pension will rise by 8.5% in April, and that universal credits and other benefits will increase by 6.7%, in line with the September inflation rate, and not the lower October level.
Jeremy Hunt’s Autumn Statement was centered around a £$20bn (£20bn) tax giveaway. Will it be enough for Tory voters to return?
OBR predicted that the living standard, measured by real disposable income of households per person in 2024-25, would be 3.5% lower than its pre-pandemic levels.
It said that “While it is only half of the fall from peak to trough we had expected in March, this still represents the biggest reduction in living standards real since the Office for National Statistics began recording in the 1950s.”
Hunt also promised to “unlock the building of more houses” in the UK. The government has consistently missed its housebuilding targets.
There are also £32mn for “busting the planning backlog” and a plan that will refund planning fees to local authorities if they take too long in processing applications. Hunt said that he would also freeze alcohol duty, which was welcomed by the industry.