Valentin Boboc is the Chief Economist at the Institute of Economic Affairs and the author of the IEA’s Alternative Budget, published on Monday 19 October.
On Wednesday 28 October, the Chancellor, John Healey, will deliver the Autumn Budget. He does so against a difficult fiscal backdrop.
The costs of government borrowing are slowly crowding out other government spending. To make matters worse, plugging the gaps with higher taxation will, in turn, crowd out private spending. Even if one believes that the current predicament is sustainable, it is certainly undesirable.
Ahead of the Budget, the IEA has published its Alternative Budget, a costed plan setting out how the Government could put the public finances on a sustainable footing. It would return the day-to-day budget to a surplus in 2027–28 and get debt falling as a share of the economy by the end of this Parliament, even before counting any boost to growth from its reforms. Its approach is simple: tax spending rather than earning, make income tax and National Insurance simpler and flatter, and restrain the growth of welfare spending.
The good news is that balancing the books requires relatively small changes to public spending. Achieving a current budget surplus would require cash cuts of less than 1 per cent per year to the welfare budget, alongside the tax reforms set out in the IEA’s Alternative Budget.
Those tax reforms would shift the burden away from more damaging forms of taxation and towards consumption.
Different taxes have different effects on economic activity. For example, income tax reduces the reward for working hard. Stamp Duty Land Tax makes it more expensive to move home, which can be important when people relocate to seek new opportunities or be closer to family. Tariffs make imports more expensive, affecting both businesses and consumers.
The UK’s tax system is notable for the share of revenue that comes from taxes on personal income. In 2023, these made up 30.2 per cent of total tax revenue in the UK, compared with an OECD average of 23.7 per cent.
The Alternative Budget would use a broader VAT base to fund large cuts to more distortionary taxes. The proposal would extend the 20 per cent rate to a much wider range of goods and services, including food and passenger transport. This would raise about £75bn initially, allowing a range of other taxes to be cut. These cuts would include abolishing Stamp Duty Land Tax in England and Northern Ireland, inheritance tax and all customs tariffs. They would also include cuts to income tax and employer National Insurance contributions.
The Alternative Budget would introduce a new income tax system with a low rate of 6.5 per cent on the first £20,000 of income and abolish the personal allowance. Everyone with taxable income would pay income tax from the first pound. This would also remove the tapering of the personal allowance, which creates a 60 per cent marginal income tax rate between £100,000 and £125,140.
The Alternative Budget proposes a ceiling on welfare spending. Including State Pensions, the welfare budget starts at £352.8bn, just under a quarter of total public spending. If the Government held the starting cash budget at its 2026/27 level and then reduced the ceiling by 0.85 per cent per year for three years, welfare spending would fall to £343.9bn by 2029/30.
Whilst the cumulative reduction would be only about 2.5 per cent, this would represent a saving of £46bn in the year 2029/30 compared with the OBR’s projected spending path, largely because that path already includes planned spending increases.
Even after these reductions, total public spending would remain above its pre-Covid share of national income. To put things into perspective, the Government would still spend a larger share of GDP than it did in 2019/20, just before the pandemic, so the scale of spending restraint required to balance the books is modest.
Achieving this would require political resolve. If we want to stop spending money, we need to start spending political capital.
It is widely acknowledged that reducing government spending is necessary to tackle Britain’s debt and deficit problems. The problem, of course, is that everyone wants government spending to be cut somewhere but not anywhere near them. Our increasingly complex tax system is a good example of this. Over time, taxes, exemptions and subsidies have become more and more specific, with clearly delineated political constituencies for each one. Thus, making the Government less costly has become incredibly politically costly.
Meanwhile, costs are projected to keep rising. The longer we delay a moderate programme of fiscal consolidation, the harsher the eventual cuts will need to be. Mounting fiscal pressures will also crowd out a meaningful debate about the role of the state and how it should be funded.
The Budget on 28 October is an opportunity to change course. The Chancellor need not adopt every proposal in the Alternative Budget, but he should recognise that the choice is not simply between deep cuts and ever-higher taxes. Balancing the books takes surprisingly little, provided the Government is willing to spend some political capital.