British Prime Minister Rishi Sunak will be hoping that a business-friendly mini-budget unveiled on Wednesday, which also included a smattering of personal tax cuts, will be enough to boost support for his Conservative government as it heads into a likely election year.
The Autumn Statement delivered by Jeremy Hunt, the Chancellor of the Exchequer, contained three key measures: increased tax incentives to encourage business investment, a steep reduction in national insurance contributions for workers, and reforms to welfare benefits to encourage recipients to get back to work.
“We are delivering the biggest business tax cut in modern British history, the largest ever cut to employee and self-employed National Insurance and the biggest package of tax cuts to be implemented since the 1980s,” Mr. Hunt told the House of Commons.
Mr. Hunt and Mr. Sunak had been under increasing pressure from Conservative MPs to announce some tax relief in an effort to improve the party’s woeful standing in public-opinion polls. The Tories trail the opposition Labour Party by at least 20 points with an election due by January, 2025.
Mr. Sunak had been banking on the Autumn Statement to offset a string of recent setbacks that have included a cabinet shuffle that revealed more disharmony within caucus and a Supreme Court ruling that struck down the government’s key plan to tackle illegal migration.
Mr. Hunt had held off on tax cuts until recently, arguing that he didn’t want to spur inflation. But with inflation falling to 4.6 per cent from around 11 per cent a year ago and the government’s tax revenues higher than expected, Mr. Hunt said he had room to manoeuvre. “This is an Autumn Statement for a country that has turned a corner,” he said.
The government said the cut to national insurance premiums will save a worker earning £35,400 ($60,630) around £450 a year. The tax relief for businesses will increase investment by £20-billion annually, according to government estimates.
Economists said the main reason Mr. Hunt had the extra fiscal room was owing to a combination of previous tax increases, higher inflation and higher earnings, all of which boosted the government’s tax revenue by around £27-billion this year. Nearly all of that extra cash has now been committed to Mr. Hunt’s announcements on Wednesday.
The government still faces some notable challenges.
The economy has ground largely to a halt and the Office for Budget Responsibility, an independent government watchdog, said on Wednesday that it expects economic growth to remain below 1 per cent this year and in 2024.
The OBR also doesn’t expect inflation to reach the Bank of England’s 2-per-cent target until the first half of 2025, a year later than it estimated in March. That means the central bank is unlikely to soon lower its key interest rate below the current rate of 5.25 per cent, which is a 15-year high.
The government will also be hard-pressed not to increase departmental budgets, which have fallen in real terms this year because of inflation. Economists say Mr. Sunak’s commitment to increase defence spending, from 2.2 per cent to 2.5 per cent of gross domestic product, and the rising costs of health care and education mean overall government spending is almost certain to rise.
“Performance indicators for public services continue to show signs of strain,” the OBR said Wednesday. The agency noted that the backlog in courts has soared to 65,000 cases and that 11 local authorities, including the city of Birmingham, have filed notices of insolvency since 2018 because of funding cuts. That compared with just two such filings by local authorities in the preceding 18 years.
And despite the tax measures announced on Wednesday, the OBR and other economists said Britons are on track to face the highest tax burden in postwar history. That’s mainly because of government’s previous decisions to freeze several tax thresholds, such as personal exemptions, that would normally rise with inflation.
“At the time of the last general election, U.K. tax revenues amounted to around 33 per cent of national income,” said the Institute for Fiscal Studies, a London-based think tank. “By the time of the next election [expected] in 2024, on current forecasts, taxes will amount to around 37 per cent of national income – a level not sustained in the postwar period.”
The overall tax bill was not lost on critics of the government. Rachel Reeves, the Labour Party’s finance critic, said the measures announced by Mr. Hunt won’t compensate for years of tax hikes. “This is the legacy of the Conservatives and that is their record,” Ms. Reeves told the Commons.
Lindsay James, an investment strategist at Quilter Investors, questioned whether Mr. Hunt’s statement would do much to encourage economic activity. ”This was billed as an ‘Autumn Statement for growth’ and the government is attempting to give the economy a shot in the arm. But it is questionable how effective and long-lasting this growth will be,” she said.
Others were more positive. “The Autumn Statement is a step in the right direction towards lower taxes and economic growth, but not a leap,” said Mark Littlewood, director-general of the Institute of Economic Affairs, a free-market think tank.