Mike Denham is Chairman of the TaxPayers’ Alliance.
As the dust settles on last week’s Budget, and the media content themselves that they’ve uncovered all of Jeremy Hunt’s hidden fiscal wheezes, the Westminster circus will move on. But for Conservatives, there are still big questions to address. On current plans, the tax burden is heading for its highest level in 75 years – if we are to return to a higher growth path we must find a way to cut that burden. The mini-Budget last autumn showed that bond markets are not prepared to give any government the benefit of the doubt. They need to see how tax cuts will be funded by spending restraint. This is the big problem: without getting a grip on spending, neither this government nor any in the future will be able to cut taxes.
As for Hunt’s first Budget,, it was generally bad news on taxation. While we may have dodged a recession for now, we’re due for the highest two-year fall in living standards since records began, thanks in large part to sky high tax bills. There will be massive stealth hikes due to income tax thresholds being frozen. Tobacco duties are going up, alcohol duties too in the autumn. Fuel duty was cut, but is expected to rise in 2027-28. Corporation tax hikes went ahead – with the headline rate set to jump by a third – although admittedly with a welcome move towards full expensing. Lifetime pension allowances were abolished, which was something we called for and was welcome.
But overall, Hunt’s plans will see the ‘tax burden’ (that is, taxes as a percentage of GDP) rise to an excruciating 37.7 per cent of GDP by 2027-28. As the OBR explains, this is 4.7 percentage points above where it stood before the pandemic. For context, we previously worked out before the 2019 election that Labour was set to impose the highest tax burden ever, at 37.9 per cent by 2023-24. As the 2024 general election draws near, Hunt will likely find some tax cuts to bring it down. But as it stands, he will take taxes in Britain to just below the level planned by Jeremy Corbyn.
The reason why is that the government has lost control of public spending. Ministers are taking spending as a percentage of GDP – let’s call it the ‘government burden’ – to jaw-dropping levels. From an average level of 36.4 percent in the 1990s, the OBR’s long-term fiscal projections imply public spending is likely to race past 50 percent of GDP, reaching around 60 per cent in the 2060’s.
With its new policy on free childcare, the Budget created a new arm of the welfare state to care for people’s children. Unsustainable public sector pensions will be made worse by the higher annual allowances, given contributions (as part of, for example, the NHS defined benefit scheme) are calculated more generously than the private sector. OBR numbers forecast huge rises in the council tax take in England, which is projected to grow by £13bn by 2027-28, likely to fund ballooning social care. Far from defusing our ticking fiscal time bomb Hunt has made the situation worse.
As Andrew Neil said, this was the Budget of a mainstream social democratic government that believes in a big, activist state. Now, some may argue that an activist state is necessary in the twenty-first century, and actually can reduce demand for government. Many in this Conservative government seem to believe it. But even if there is some truth in the argument, the Budget highlights how slow, difficult and expensive that approach is.
For example, the Chancellor is hoping his measures will encourage around 110,000 people into the workforce by 2027-28. A relatively modest number. By then, the 30 hour childcare package will cost around £5.24 billion annually, expected by the OBR to be responsible for around 60,000 new workers. That’s £87,000 per year, per worker.
For context, economic inactivity among over 16s has risen by 830,000 since the pandemic. This will be a drop in the ocean, but eye-wateringly expensive. These kinds of interventions are not an affordable way to increase labour participation. Similarly, the effective creation of a basic income for disabled people returning to work is certainly innovative, but only expected to see around 10,000 more people get into work.
Let’s be clear though: Hunt – and the OBR – looking at the potential supply side impacts in this way is to be applauded. Supply side reforms – increasing efficiency, innovation, technology, labour participation and the like – are the only way to defuse this fiscal bomb. But the government has abandoned the idea of bold, conservative reforms to do it. For example, on childcare, the move to align staffing ratios with Scotland will still leave us with some of the most restrictive in the world.
And on Corporation Tax, although full expensing is welcome, the relief is is both partial and temporary: our dynamic tax model, which looks at the impact of tax changes on the economy, predicts that the rise in the corporation tax headline rate will easily outweigh full expensing in its impact on capital investment, and will also deter inward investment. Meanwhile, public sector headcount, having already grown by more than the size of the Tesco UK workforce since 2018, has now ballooned to 5.8 million, while their productivity is down 7.4 per cent on pre-pandemic levels. The tax regime is getting even more labyrinthine, with new complications on energy and R&D.
Cutting red tape, reducing marginal rates of tax, driving public sector efficiencies, simplifying the tax regime and allowing space for private investment all seem beyond the capacity of this government, but they are essential to our future prosperity. The fiscal crunch that is coming, with levels of public spending which would make even Gordon Brown blush, pose an existential threat to the Conservative promise of lower taxes. Hunt must urgently rediscover an interest in tax-cutting, supply side reform, and getting a much firmer grip on spending. Either that or doom future Tory governments, and more importantly, the country to fiscal ruin.
Mike Denham is Chairman of the TaxPayers’ Alliance.
As the dust settles on last week’s Budget, and the media content themselves that they’ve uncovered all of Jeremy Hunt’s hidden fiscal wheezes, the Westminster circus will move on. But for Conservatives, there are still big questions to address. On current plans, the tax burden is heading for its highest level in 75 years – if we are to return to a higher growth path we must find a way to cut that burden. The mini-Budget last autumn showed that bond markets are not prepared to give any government the benefit of the doubt. They need to see how tax cuts will be funded by spending restraint. This is the big problem: without getting a grip on spending, neither this government nor any in the future will be able to cut taxes.
As for Hunt’s first Budget,, it was generally bad news on taxation. While we may have dodged a recession for now, we’re due for the highest two-year fall in living standards since records began, thanks in large part to sky high tax bills. There will be massive stealth hikes due to income tax thresholds being frozen. Tobacco duties are going up, alcohol duties too in the autumn. Fuel duty was cut, but is expected to rise in 2027-28. Corporation tax hikes went ahead – with the headline rate set to jump by a third – although admittedly with a welcome move towards full expensing. Lifetime pension allowances were abolished, which was something we called for and was welcome.
But overall, Hunt’s plans will see the ‘tax burden’ (that is, taxes as a percentage of GDP) rise to an excruciating 37.7 per cent of GDP by 2027-28. As the OBR explains, this is 4.7 percentage points above where it stood before the pandemic. For context, we previously worked out before the 2019 election that Labour was set to impose the highest tax burden ever, at 37.9 per cent by 2023-24. As the 2024 general election draws near, Hunt will likely find some tax cuts to bring it down. But as it stands, he will take taxes in Britain to just below the level planned by Jeremy Corbyn.
The reason why is that the government has lost control of public spending. Ministers are taking spending as a percentage of GDP – let’s call it the ‘government burden’ – to jaw-dropping levels. From an average level of 36.4 percent in the 1990s, the OBR’s long-term fiscal projections imply public spending is likely to race past 50 percent of GDP, reaching around 60 per cent in the 2060’s.
With its new policy on free childcare, the Budget created a new arm of the welfare state to care for people’s children. Unsustainable public sector pensions will be made worse by the higher annual allowances, given contributions (as part of, for example, the NHS defined benefit scheme) are calculated more generously than the private sector. OBR numbers forecast huge rises in the council tax take in England, which is projected to grow by £13bn by 2027-28, likely to fund ballooning social care. Far from defusing our ticking fiscal time bomb Hunt has made the situation worse.
As Andrew Neil said, this was the Budget of a mainstream social democratic government that believes in a big, activist state. Now, some may argue that an activist state is necessary in the twenty-first century, and actually can reduce demand for government. Many in this Conservative government seem to believe it. But even if there is some truth in the argument, the Budget highlights how slow, difficult and expensive that approach is.
For example, the Chancellor is hoping his measures will encourage around 110,000 people into the workforce by 2027-28. A relatively modest number. By then, the 30 hour childcare package will cost around £5.24 billion annually, expected by the OBR to be responsible for around 60,000 new workers. That’s £87,000 per year, per worker.
For context, economic inactivity among over 16s has risen by 830,000 since the pandemic. This will be a drop in the ocean, but eye-wateringly expensive. These kinds of interventions are not an affordable way to increase labour participation. Similarly, the effective creation of a basic income for disabled people returning to work is certainly innovative, but only expected to see around 10,000 more people get into work.
Let’s be clear though: Hunt – and the OBR – looking at the potential supply side impacts in this way is to be applauded. Supply side reforms – increasing efficiency, innovation, technology, labour participation and the like – are the only way to defuse this fiscal bomb. But the government has abandoned the idea of bold, conservative reforms to do it. For example, on childcare, the move to align staffing ratios with Scotland will still leave us with some of the most restrictive in the world.
And on Corporation Tax, although full expensing is welcome, the relief is is both partial and temporary: our dynamic tax model, which looks at the impact of tax changes on the economy, predicts that the rise in the corporation tax headline rate will easily outweigh full expensing in its impact on capital investment, and will also deter inward investment. Meanwhile, public sector headcount, having already grown by more than the size of the Tesco UK workforce since 2018, has now ballooned to 5.8 million, while their productivity is down 7.4 per cent on pre-pandemic levels. The tax regime is getting even more labyrinthine, with new complications on energy and R&D.
Cutting red tape, reducing marginal rates of tax, driving public sector efficiencies, simplifying the tax regime and allowing space for private investment all seem beyond the capacity of this government, but they are essential to our future prosperity. The fiscal crunch that is coming, with levels of public spending which would make even Gordon Brown blush, pose an existential threat to the Conservative promise of lower taxes. Hunt must urgently rediscover an interest in tax-cutting, supply side reform, and getting a much firmer grip on spending. Either that or doom future Tory governments, and more importantly, the country to fiscal ruin.