Contradictions over tax-cut promises in October Budget?
With considerable financial pressure on all public services, as well as circumstances that will be out of his control, is the Chancellor’s Budget promise of pre-election tax cuts even a reality, when the prime minister has to go to the country no later than May 2024?
The UK’s tax burden is actually on course to reach its highest level since the 1950s. But spending is up too, in every government department, and this was announced with a Johnsonian-like level of energy and enthusiasm. But with worker shortages in some areas, also things like treatment backlogs and supplier costs, this will absorb some of the promised extra funding. Also, much of the additional spending has simply reversed planned cuts in previous Budgets.
For anyone looking for optimism in the Budget, though, the Office for Budget Responsibility (OBR) set growth at a higher rate than it had previously forecast. Unemployment has hopefully peaked at a lower rate than was anticipated at the start of the pandemic. The better-than-expected rebound increased the Chancellor’s capacity to increase spending and reduce borrowing. What also helped were tax-raising measures announced before October, such as the new Health and Social Care Levy, ringfenced to fund extra measures for health, also the 6% increase in the main corporation tax rate.
But what about inflation? There are concerns about how rising inflation will impact on the standards of living for millions, particularly those who have been affected by the withdrawal of the temporary uplift in Universal Credit. Higher inflation will affect public sector budgets to. It does cause fiscal drag though, bringing more people into the scope of income tax, or pushing them into a higher tax band. So, the treasury benefits from more money coming in, without having to increase headline rates. Of course, we already know that headline rates of employee and employer NICs and dividend tax are set to increase by 1.25%, temporarily, in the coming year, before being replaced by the Health and Social Care Levy.
Investing to boost growth
The government’s capital investment programme was not scaled back, despite the pressures on public finances since, and because of, Covid. The Chancellor is particularly keen to be shown as a supporter of growth and investment outside of London.
Two new fiscal rules
Also announced by the Chancellor were a current budget balance target and a declining debt-to-GDP ratio, which should start to fall as the economy grows. Together, they provide a framework for generating enough revenue from tax to cover day-to-day spending, with an allowance for borrowing for investment. In fact, we could say that there is more analysis of the public balance sheet than ever – we have greater insight into how the government is managing it, also the risks facing public finances, particularly on the liabilities side.
To find the real story of any Budget, you always need to look behind the headlines and wait until the dust has settled. With interesting times ahead for businesses, talk with Figurit about tax planning, and how you can optimise your finances including personal finances.
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