Leading Think Tank Warns Against Tax Cuts in Upcoming Budget
The Institute for Fiscal Studies (IFS), a prominent think tank, has issued a warning against tax cuts in the upcoming Budget unless the government can provide a clear plan on how to afford them. The chancellor has expressed his desire to lower taxes, but the IFS argues that the case for tax cuts is weak.
The government has not commented on whether further tax cuts would be affordable in the Budget. However, both Jeremy Hunt and Rishi Sunak have openly expressed their intentions to reduce the tax burden on the general public. Chancellor Hunt has suggested that trimming public spending could be a way to deliver tax cuts.
The IFS disagrees with this approach and believes that tax cuts should be postponed until a detailed spending review can be conducted. According to Carl Emmerson, the deputy director of the IFS, implementing certain tax cuts now, without clear plans for spending cuts, is not advisable. He states, “We don’t think we should be implementing certain tax cuts now, essentially that are paid for by uncertain spending cuts that might never be delivered.”
The IFS highlights that taxes in the UK are already at record-high levels when compared to the overall size of the economy. Additionally, government debt is high and rising, with little indication of it falling within the next five years. The IFS argues that even the current outlook for public finances is based on unlikely spending cuts and tax rises.
Given these circumstances, the IFS concludes that there is only a weak economic case for significant tax cuts in the upcoming Budget. If tax cuts are to be considered, the IFS suggests reforming stamp duty on property or shares instead of reducing income tax or National Insurance rates.
While tax cuts can potentially boost economic growth, Mr. Emmerson emphasizes that they do not pay for themselves. He suggests that focusing on genuine tax reform, such as cutting stamp duty on property and shares, would be more beneficial for growth than reducing the main rate of national insurance.
Reports indicate that the chancellor may opt for a 1% cut in employee National Insurance, along with keeping fuel duty frozen. The Treasury is also considering taxing vapes, specifically the nicotine-based liquid used in e-cigarettes. However, to encourage adult smokers to switch to e-cigarettes, Mr. Hunt would simultaneously increase taxes on tobacco.
The IFS warns that unprotected areas, such as justice and local government, would face significant budget cuts if tax cuts were implemented. Local councils are already struggling with their own debts after years of shrinking budgets. To maintain current spending levels for unprotected services and fulfill other commitments, the chancellor would need to find an additional £25 billion.
Criticism of the suggestion for tax cuts has come from various sources. The Office for Budget Responsibility (OBR) has described the government’s post-election spending plans as a “work of fiction.” The International Monetary Fund (IMF) has also advised against further tax cuts in its latest assessment of the world economy.
This Budget holds particular significance as it could be the last opportunity for the chancellor to announce major policy changes before a general election, which must be held by January next year. The government is projected to borrow £113 billion this year, twice the amount borrowed prior to the pandemic. The IFS cautions that any extra “headroom” in the Budget is partly due to a decrease in interest payments on government debt, which remains volatile.
In response to the IFS report, the Treasury states that it is normal for governments to outline broad spending plans and that more detailed departmental budgets will be set in the next Spending Review. The Treasury spokesperson emphasizes that fiscal rules are being met and that total departmental spending will be £85 billion higher after inflation by 2028-29 compared to the start of this Parliament, including record funding for the NHS.
Overall, the IFS urges caution regarding tax cuts in the upcoming Budget, emphasizing the need for a clear plan to afford them. The think tank highlights the high levels of taxes and government debt, as well as the uncertain nature of spending cuts and tax rises. While tax cuts can stimulate growth, the IFS suggests focusing on genuine tax reform, such as stamp duty reductions, to achieve better economic outcomes.