UK finance minister Jeremy Hunt is poised to announce a tax cut for workers Wednesday when he unveils what is likely to be the government’s last budget before a general election later this year.
A cut to national insurance — a levy paid by people who work — costing around £10 billion ($12.7 billion) is likely, according to multiple UK media reports. But soaring government debt, crumbling public services and a lackluster economy leave the chancellor with very little room for further substantial giveaways.
The UK economy barely grew in 2023, slipping into recession at the end of the year in stark contrast with Prime Minister Rishi Sunak’s pledge to generate economic growth. In 2024, the Bank of England sees output expanding just 0.25%.
Despite that gloomy backdrop, Hunt is expected to deliver an upbeat assessment of Britain’s economic prospects.
“We can now help families with permanent cuts in taxation,” he is due to say, according to a statement from the Treasury. “Conservatives know lower tax means higher growth. And higher growth means more opportunity and more prosperity.”
Hunt’s Conservative Party is trailing the opposition Labour Party with a wide margin in opinion polls, giving him every reason to unveil tax cuts, however small, in a last-ditch bid to win voters.
But modest reductions to income or payroll taxes are unlikely to change the fact that Britain’s overall tax burden remains at a post-war high and living standards have fallen. Meanwhile, rising debt means less money for public goods.
UK government debt has surged more than 40% since 2020, as the state spent big to cushion the economy from the impact of Covid-19 lockdowns and soaring energy costs following Russia’s full-scale invasion of Ukraine.
At the end of January, public sector debt surpassed £2.6 trillion ($3.3 trillion), according to the Office for National Statistics, a level not seen since the early 1960s and almost the same size as the nation’s annual gross domestic product.
The cost of servicing that growing debt pile is siphoning ever greater amounts of money away from vital public services, which have already been squeezed by inflation and past budget cuts.
Several local authorities have recently declared themselves bankrupt — including Britain’s second-biggest city, Birmingham, which on Tuesday approved plans to slash local services and dim street lights as it tries to balance the books. The Local Government Association warned in December that councils in England face a £4 billion ($5.1 billion) funding gap this year and next.
Other so-called “unprotected” areas of the national budget, such as social care and the police force, are also at risk. Spending on defense, schools, the National Health Service and overseas aid has been ringfenced for now.
The government’s current plans for public spending look “implausible,” economists at Capital Economics wrote in a note last month, pointing to considerable cuts to unprotected spending penciled in from next year.
“That seems unlikely when public services are creaking,” they added. “Whoever wins the election will probably need to admit both taxes and spending will need to be raised.”
Capital Economics is not alone in suggesting that the government has played fast and loose when talking about its spending plans. Its own fiscal watchdog, the Office for Budget Responsibility, made a similar point recently.
OBR chair Richard Hughes said in January that the government had provided no detailed breakdown of departmental spending plans beyond March next year, giving only headline figures.
“Some people have referred to that as a work of fiction,” Hughes said.
“That is probably generous, given that someone has bothered to write a work of fiction, whereas the government have not even bothered to write down their departmental spending plans underpinning their plans for public services,” he added.
Hunt will deliver his budget announcement in parliament from 7:30 a.m. ET.
— CutC by cnn.com
