Amid lackluster prospects for economic growth, the British government has announced it will cut taxes for workers ahead of a general election this year.
Jeremy Hunt, Britain’s top finance official, told lawmakers on Wednesday he would cut National Insurance, a payroll tax paid by workers and employers that funds state pensions and some benefits, by two percentage points. That would take the rate for about 27 million employees down to 8 percent, and follows a two-percentage-point cut announced less than four months ago. Together, the cuts will save the average employee about 900 pounds ($1,145) a year, Mr. Hunt said. The rate for self-employed workers is also reduced. Both changes will take effect in early April.
“We can now help families not just with temporary cost-of-living support but with permanent tax cuts,” Mr Hunt, the chancellor of the Exchequer, told Parliament. “We are doing this to provide much needed help in challenging times. But because the Conservatives also know that lower taxes mean higher growth.
Mr. also announced Hunt smaller measures, including freezing taxes on alcohol and fuel, proposals to increase productivity in the public sector, and removing tax benefits for foreign earnings of British permanent residents is in another country.
The chancellor is under political pressure from the ruling Conservative Party to cut taxes ahead of the general election, which is expected to take place this year, although a date has not yet been set. The party is trailing the opposition Labor Party in the polls.
But the ability of Mr. Hunt’s offer of sweeteners to voters has been hampered by the fact that Britain’s economy is growing slowly — if at all. Stretched public services need money, and there are calls to invest more in infrastructure. The chancellor also had to meet his self-imposed budget rules, which gave him less fiscal room to maneuver.
By cutting some taxes, the Conservative Party hopes to change the narrative that the end of their 14 years in government was dominated by tax increases. But because of income tax-related freezes and other measures, the tax burden, measured by tax receipts as a percentage of gross domestic product, is set to rise to the highest since World War II . The income tax cut, a more broad-based tax, was reportedly ruled out over concerns about the cost of such a giveaway and the risk that it would increase inflation.
However, there is a feeling among economists and other analysts that this budget will thwart the next government – perhaps led by Labor if the polls hold – by giving tax cuts now and leaving a less money available for many government departments after the election.
The spending restraint put in place after the election looks “very difficult to deliver,” according to economists at the Institute for Fiscal Studies.
The Conservative Party is fighting for its electoral future against an unforgiving economic backdrop. Although inflation has eased to 4 percent from double-digit highs, the Bank of England is wary of cutting interest rates any time soon. Meanwhile, businesses are failing at a rapid clip, and voters say they want measures to help mitigate the high cost of living.
The British economy ended last year in a recession. This year, it is expected to grow 0.8 percent and then 1.9 percent in 2025, according to the Office for Budget Responsibility, an independent fiscal watchdog.
“As we’ve turned the corner on inflation, we’re about to turn the corner on growth,” Mr. Hunt said.
Budgets across Europe are under stress as economies feel the pinch of higher interest rates and the need to spend more on defense and invest more aggressively in the green transition. At the same time, officials are trying to reduce debt levels after spending heavily throughout the pandemic and support households through an energy crisis sparked by Russia’s invasion of Ukraine and the shutdown of a major source of natural gas. gas. Last month, the French government announced spending cuts of 10 billion euros ($10.9 billion).
On Wednesday, Mr. Hunt said he would keep growth in daily government spending at 1 percent, adjusted for inflation, for the next five years. And instead of increasing those budgets, the money would be spent “more efficiently,” he said, listing proposals to use technology, including artificial intelligence, to increase productivity in health, policing and courts. .
The British government has previously said it will continue to spend on defense as part of national income. Mr Hunt outlined big increases in childcare funding, money for the National Health Service and a pledge to keep spending on schools flat after adjusting for inflation. That leaves other government departments, such as courts, prisons and local government, facing potentially steep cuts. High inflation also undermined the power of earlier spending plans.
This puts the next government in a tight spot. To maintain tax cuts and maintain previous spending commitments, the next government will need to allow other spending cuts to continue, despite voters calling for more investment in public services. Or, the next government will have to raise taxes, something the main political parties are not willing to propose before an election.
But the perspective can change. If the economy grows more strongly or productivity increases, public finances may become more favorable. To promote this, Mr Hunt stressed that his plans, including cuts to National Insurance, would encourage people to go back to work. Today, 700,000 more Britons are reported to be out of the labor force than before the pandemic.
Some of the tax cuts will be financed by a change in the tax treatment of foreign income for so-called non-domiciled residents, people whose permanent home is outside Britain. This will raise £2.7 billion a year by 2029, Mr Hunt said.
The change creates a challenge for the Labor Party, which has planned to revoke the status of “non-doms” to raise money to fund some of its election promises, such as NHS recruitment and an expanded school breakfast service.
Changing nondom policies raises “money that the opposite party plans to use for increased spending,” Mr. Hunt said. “But now a Conservative government is making a different choice. We’re using that revenue to help reduce taxes on working families.”
Keir Starmer, the leader of the Labor Party, said the government was asking Britons to “pay more and more for less and less.”
He added that it was a “desperate step, after years of resistance, to finally accept Labour’s arguments on the non-dom tax rate.” And so, “if they’re committed to supporting this policy now, the question they have to answer now is, why didn’t they do it earlier?”
