SearchA budget for long term growth?
The Chancellor started by setting out recent economic progress. Highlights include growth, which is expected to remain positive for the next few years and compares favourably to other major European economies, inflation, which is falling back to the targeted level of two per cent by April, and national debt, which at 94 per cent of GDP is the second lowest level in the G7.
Jeremy Hunt then moved on to policies aimed at supporting cost-of-living issues, such as extending the freezes on fuel and alcohol duties.
Other fiscal measures of note included:
· A reduction in the capital gains tax rate on the sale of residential properties from 28 to 24 per cent
· An increase in air passenger duty on non-economy flights
· A new duty on vaping from 2026
· A £5,000 increase to the sales threshold at which VAT registration is required, from £85,000 to £90,000.
The Chancellor also announced the abolition of the ‘non-dom’ personal tax regime, to be replaced by a residency-based test after a four-year transition period. A measure the Prime Minister appeared to accept with magnanimity, given his domestic circumstances!
However, the real headline-grabber was the 2p reduction in the employee national insurance rate from 10 to eight per cent. This takes effect from April, and is likely to be roundly welcomed. According to Mr Hunt’s statistics, the average working person should be around £900 better off each year once this measure is combined with the 2p rate cut that was adopted in the autumn statement last year.
Understandably, Mr Hunt used this announcement to flag a path to lower taxation. He explained that the progress the government has made with economic growth and public spending restraint has allowed him to do this.
But a closer examination reveals that this reduction in national insurance is at least in part funded by stealthy increases to income tax afforded by ‘fiscal drag’.
This is what happens when tax allowances do not keep pace with inflation, meaning more and more working people are ‘dragged’ into tax.
The difficult truth for Mr Hunt is that the tax burden on individuals remains higher now than it has been in several generations.
Independent bodies estimate annual tax receipts will be up to £40bn a year higher by 2028 than would be the case had income tax allowances kept pace with inflation. The reduction in national insurance, while welcome, is unlikely to change that fact.
The Chancellor’s repeated pointing of the finger at the Labour front bench to accuse them of raising taxes was, I suspect, an attempt to deflect from this uncomfortable truth.
In the context of what is likely to be the penultimate or even final major fiscal showcase before the general election, the Chancellor’s decision to reduce national insurance rates looks like an astute political move.
It enables him on the one hand to point to eye-catching tax rate cuts while at the same time increasing the actual tax take for the Treasury. This enables him to deliver on two political promises: being seen to help with cost-of-living issues and maintaining spending on public services.
As I’ve said previously, it’s a clever sleight-of-hand.
In conclusion, the Chancellor said there is much to be positive about, and economic indicators are starting to point in the right direction.
Many people will be pleased to hear the promises in particular on additional NHS spending, and the reduction in national insurance rates.
What remains to be seen is whether these measures are enough to help improve the Conservative government’s fortunes in what will be a frenetic few months of campaigning leading up to the general election.