Millions to be 'worse off' at general election despite Budget tax cuts, warn top economists

Millions of households across Britain face being worse off at the upcoming general election compared with the previous election, leading economists have warned.

The highly respected Institute for Fiscal Studies raked over the details of the spring Budget before delivering its full verdict on Thursday.

But giving an early insight into its thinking, IFS director Paul Johnson said: “In all likelihood households will be worse off on average at the next election than they were at the last election.

“That is really not a recipe for a happy electorate.”

Chancellor Jeremy Hunt is hoping his cuts to National Insurance, announced on Wednesday and in the Autumn Statement last year, which combined amount to a £900 reduction for workers on an average salary, will boost Tory hopes for the election expected in November.

It comes as the Torys hit rock bottom on Monday with support for their party across Britain falling to a record low of just 20 per cent, according to the Ipsos survey for The Standard.

But the overall tax burden in Britain is still set to rise to its highest since 1948, partly down to a series of stealth tax rises including the freezing of income tax and National Insurance thresholds.

An estimated 3.7 million people will be pulled into paying income taxes by 2028-29 as a result of continued freezes to thresholds, according to the UK's fiscal watchdog, the Office for Budget Responsibility (OBR).

Meanwhile, 2.7 million people could be pulled into paying the higher rate of income tax by the same period.

The Chancellor stressed that his specific tax cuts would be “permanent” - but the overall tax burden is still set to rise to 37.1% of gross domestic product (GDP) in 2028-9, the highest level since 1948.

In a highly political Budget, he also took aim at the Liberal Democrats, trying to tie them in voters’ minds to Labour ahead of a string of fiercely-fought “Blue Wall” election contests in London’s commuter belt, including his own Surrey seat, and the wider south.

Economic dynamism comes not from “government policies but people power”, Mr Hunt told an often-rowdy Commons.

“It is to unleash that people power that we have today put this country back on the path to lower taxes. A plan to grow the economy vs no plan (from Labour). A plan for better public services vs no plan. A plan to make work pay vs no plan. Growth up, jobs up and taxes down,” he said.

Responding, Sir Keir Starmer said Labour would abide by the Chancellor’s 2p cut to National Insurance. But he said the Conservatives had “maxed out the national credit card” with a “desperate” Budget, accusing Mr Hunt and Rishi Sunak of being the “Chuckle Brothers of decline”.

“There we have it. The last desperate act of a party that has failed. Britain in recession,” the Labour leader said, accusing the Government of “giving with one hand” but taking “even more with the other”.

Wednesday’s Standard front page (Evening Standard)
Wednesday’s Standard front page (Evening Standard)

Westminster had been gripped for days over whether Mr Hunt and Rishi Sunak could rake together enough funds to pay for a 2p cut in income tax, to the tune of some £14 billion, rather than eventually opting for the cheaper 2p cut to employee National Insurance, which came with a bill of around £10 billion.

The Chancellor had already cut NI by 2p in his November Autumn Statement. The rate will now fall to 8%, saving 27 million employees £900 a year, once the two cuts are combined.

“That means the average earner in the UK now has the lowest effective personal tax rate since 1975 and one that is lower than in America, France, Germany or any G7 country,” he said. But Labour stressed that with tax thresholds frozen, millions more are getting pulled into higher income brackets and the overall tax burden continues to rise.

Mr Hunt said he wanted eventually to abolish NI altogether so that workers do not get taxed twice on their salaries, on top of income tax, and to draw millions more people back to the workforce after the Covid pandemic.

Crucially, the Conservatives are banking on the economy pulling out of recession this year to inject a feel-good factor ahead of the election, widely expected to be in November.

Chancellor of the Exchequer Jeremy Hunt leaves 11 Downing Street, London, with his ministerial box (Stefan Rousseau / PA Wire)
Chancellor of the Exchequer Jeremy Hunt leaves 11 Downing Street, London, with his ministerial box (Stefan Rousseau / PA Wire)

Accompanying Mr Hunt’s statement, the Office for Budget Responsibility (OBR) released upgraded forecasts. After a recession in the second half of 2023, it said that UK GDP will grow 0.8% this year and 1.9% in 2025.

The OBR predicted inflation will fall from 4.2% in the final quarter of 2023 to an average of 2.2% this year and 1.5% in 2025. That offers potential relief from high interest rates if inflation retreats to the Bank of England’s target of 2%.

The Chancellor offered more help on child benefits to parents earning more than £50,000 a year and cut the top rate of capital gains tax on property sales.

But after months of decrying Labour’s plan to scrap non-dom status for wealthy foreigners, whose beneficiaries have included Rishi Sunak’s wife Akshata Murty, Mr Hunt announced it would end. Those with the “broadest shoulders” should pay more, he said.

Duties on fuel and alcohol were frozen for another year, an oil and gas windfall tax was extended, excise duty will be introduced on vapes and flyers in business and first class will have to pay more in tax.

With polls showing growing disquiet about the state of public services, Mr Hunt opted against paying for his tax cuts through swingeing cuts to Government spending.

The overall spend by departments will still go up 1% in real terms, but they will be expected to make their budgets go further through a new Public Sector Productivity Plan to extract more efficiency.

An NHS productivity plan costing £3.4 billion will be funded in full, with the aim of improving the health service’s IT systems including via artificial intelligence, to free up the time of doctors and nurses.

But the OBR also highlighted assumptions inherent to Mr Hunt’s calculations for future years - noting that he relied on raking in nearly £5bn more from fuel duty by 2028-29, despite it being frozen for 14 years, and on making huge savings from NHS efficiency.

Some £20 billion of public sector productivity improvements were also baked into the sums, which would only mean returning to pre-pandemic levels, but still did not appear to be money that could be totally banked.

The Chancellor’s tax and spend plans were also expected to see debt falling as a percentage of GDP in later years, meeting one of his two fiscal rules.

The Chancellor pictured briefing Cabinet on his budget (Simon Walker / No 10 Downing Street)
The Chancellor pictured briefing Cabinet on his budget (Simon Walker / No 10 Downing Street)

But there was no hiding from the relentless rise in the tax burden which has hit Britain through a series of stealth taxes including freezing the thresholds for income tax and National Insurance contributions as the public finances have been rocked by the Covid pandemic and Vladimir Putin’s war in Ukraine.

Mr Hunt, who has sought to right the Tories’ reputation for economic competence torpedoed by Kwasi Kwarteng’s disastrous “mini Budget” under Liz Truss’ brief administration, stressed that his plans aimed to deliver long term growth by building a high-wage, high-skill economy.

His Budget, he was advocating, was setting Britain on a path to lower taxes, more jobs, and “more productive” public services.

He said: “Of course, interest rates remain high as we bring down inflation. But because of the progress we’ve made because we are delivering on the Prime Minister’s economic priorities we can now help families with permanent cuts in taxation.

“With the pandemic behind us, we must once again be responsible and increase our resilience to future shocks. That means bringing down borrowing so we can start to reduce our debt.

“The Liberal Democrats supported controlling spending in office, but now want to prop up a party after the election that will turn on the spending taps. It’s the difference between Labour with no plan and the Liberal Democrats with no principles.”

However, leading economists have cast serious doubt on the Government plans, warning of a squeeze on unprotected departmental spending.

It was also not clear if his specific tax cuts would be enough to satisfy a number of Tory MPs who have been pushing for dramatic reductions or whether Sir Keir would be able to evade any political fall-out from Mr Hunt’s move.

Scottish Tory MP Andrew Bowie, a minister in the Department for Energy Security and Net Zero, was said to be on resignation watch in protest at the extension to the North Sea Energy Profit Levy (EPL).

"There is much in this budget to welcome... However, the extension of the EPL is deeply disappointing. I will be working with him to resolve this," he tweeted.

Chancellor Jeremy Hunt prepares for the Spring Budget 2024, in his office at No 11 Downing Street (Kirsty O'Connor / HM Treasury)
Chancellor Jeremy Hunt prepares for the Spring Budget 2024, in his office at No 11 Downing Street (Kirsty O'Connor / HM Treasury)

Mr Hunt said he wanted to boost GDP-per-head, rather than just GDP through immigration, but key to this will be getting millions of people already in Britain of working age back into the labour market.

A new “British ISA” will allow savers to invest an additional £5,000 in UK-based companies and assets, with the aim of helping them expand.

Other announcements included a £360 million investment in advanced manufacturing projects across the life sciences, automotive and aerospace sectors.

Mr Hunt has also announced changes to pension regulations, including a requirement for funds to declare how much they invest in UK companies, in order to “focus minds” and boost investment in British businesses.

Shadow Chancellor Rachel Reeves said Labour is “now the party of economic responsibility” as she accused the Tories of overseeing “fourteen years of economic failure”.