Addressing the House of Commons in his Autumn Statement, Chancellor Jeremy Hunt today stressed that he was delivering a “statement for growth” with an aim to reward work. Announcing tax cuts to National Insurance and reform to the benefits system, the Chancellor was keen to elucidate that falling inflation and reduced borrowing have allowed the government to cut taxes and invest in areas such as R&D in Life Sciences. While anticipated cuts to Inheritance Tax did not materialise, Hunt went further than expected in cutting National Insurance, but close analysis of the statement leaves one with a mixed impression of the government’s performance.
National Insurance is a tax that specifically targets workers, contrasting with Income Tax which also taxes earnings from rent and returns on investment. Politically speaking, it therefore makes sense to focus on NI when espousing the value of rewarding work. Class One National Insurance – paid by employees – will be cut by 2%pts (equivalent to a 16.6% cut) from 12% to 10%. Self-employed, small business owners are also set to see cuts, with Class Two National Insurance being abolished entirely and Class Four decreasing from 9% to 8%.
However, these cuts in the rates of National Insurance will not necessarily reduce the overall tax burden citizens face. This is a result of fiscal drag. Fiscal drag describes the phenomenon whereby rising nominal wages “drag” people into a higher tax bracket without their real income increasing. Tax thresholds are currently frozen at nominal rates – the rate at which people are taxed is determined by how much money they earn. This means that a below-inflation pay rise can tip people into the next tax bracket, increasing their burden overall. Fiscal drag can be seen as a “stealth tax”. Speaking on the BBC, Director of the Institute of Fiscal Studies Paul Johnson explained that today’s cuts will not compensate for fiscal drag, meaning that the overall tax burden will continue to increase. According to OBR forecasts shared on X, tax as a percentage of GDP in the UK will reach 37.7% in 2028/29.
One particularly interesting fact relates to how fiscal drag takes earners above the Personal Allowance Threshold, which allows people to earn up to £12,570 without being subject to Income Tax. BBC Economics Editor Faisal Islam noted that fiscal drag will effectively reverse the number of people that the Tories took out of paying income tax through implementation and subsequent review of the Personal Allowance Threshold.
Local Housing Allowance
Apparent improvements which pale under analysis can also be found elsewhere in the Autumn Statement. The Local Housing Allowance is a benefit that determines how much private renters can claim as the Housing aspect of their Universal Credit. In 2010 this was set to the 30th percentile of the private renting market in local areas. This meant that claimants would be able to rent a property in the cheapest 30% of properties in their local area. However, since the pandemic, increases in rent have resulted in the LHA offering much less coverage than it did prior to the freezing of the nominal rate at 2019/20 levels. While today’s statement announced that the Local Housing Allowance would return to the 30th percentile, it is notable that prior to George Osborne’s 2010 Emergency Budget, it had been set at the 50th percentile. The reforms announced today will certainly be welcomed by many, but by no means constitute unprecedented government aid.
One area whose success stands unblemished is the 8.5% increase in the State Pension, with the Tories remaining adhered to the Triple Lock. The source of much speculation due to its costliness, the Triple Lock guarantees that pensions will be routinely increased by the highest of: the rate of inflation, the average increase in earnings, or 2.5%. Many have noted that the Triple Lock’s importance for the Conservatives is inextricably linked to older voters’ propensities to turn out to vote, and to use their votes to support the Tories. Without succumbing to cynicism, it is interesting to consider the distinctly political aspects of this statement.
Consistently lagging in the polls after 13 years of government, the Conservatives would be optimistic to expect much less than a Labour landslide in the next election. Posting on X, the OBR has reported that by 2024/25, there will have been a 3.5% diminution in living standards from pre-pandemic levels. This will be the highest reduction in living standards in recorded history. Although many analysts might credit the government for its performance, since this is only half the reduction that was predicted in March, it seems that the general public will likely vote on the basis of lived experience.
For this reason, one might be interested in Labour’s approach. Shadow Chief Secretary to the Treasury Darren Jones revealed, without offering much in the way of detail, Labour’s ambitions to lower taxes, and emphasised the need for reform in the NHS rather than only increasing funding. (Whether this translates to delivering no significant funding increases remains to be seen.) It seems that the two parties broadly share economic visions for the country, with a focus on supply-side policies with the expectation that private enterprise will drive growth and rescue the economy. However, these visions remain paired with an overall historically high tax burden – although one that, according to the IMF, remains lower than countries such as France, Canada, and Germany. Furthermore, IFS Director Paul Johnson has criticised Hunt’s freeze on government investment, which in real terms will amount to a cut.
Ultimately, today’s statement seems to mark the beginning of a project, delivered by a government which may not have much time left. Fortunately for them, their legacy might well be safe with Labour.