We are less than four weeks away from the unveiling of the government’s 2024 fiscal plan. This is a Budget that has been pre-ordained as a crowd-pleaser, if not an election-saver. Faced with a weary electorate fed up with the cost of living crisis, mortgage and rent struggles, creaking public services and the highest tax burden in the post WW2 years, all reflected in poor ratings, it’s clear why the government wants to grab an opportunity to ease the public’s burden and abandon fiscal caution for now.
A cut in basic rate tax to 19 per cent, an increase in the personal allowance or an early end to the freezing of tax bands would all get an enthusiastic reception. This latter stealth measure has been particularly effective at sweeping millions of people into the next tax band up. Meanwhile, accountancy firm RSM makes the case for a cut in corporation tax. It says the UK is “starting to look expensive” with the statistics showing that in the past five years the average corporate tax rate across the OECD has been 23.5 to 24 per cent. The UK’s rate of 25 per cent which came into effect last April could, it says, act as a brake on UK corporate activity and discourage inward investors.
But however much a tax giveaway would sway discontented voters or stimulate growth, it may not materialise next month.
For tax cuts to happen, the cost at the time of implementation must not jeopardise the chancellor’s vow to cut national debt as a share of GDP within a period of five years, but Office for Budget Responsibility (OBR) number crunchers have been signalling that the headroom required to deliver cuts is shrinking.
The level of reasonable fiscal headroom needed for tax cuts, or big spending plans, is probably around the £30bn mark. The OBR is forecasting there will be only c£14bn. Still, the parts of the equation are constantly moving and the sums will be updated ahead of the Budget. While there was no succour from the Bank of England in the form of a rate cut last week, the outlook could change if the forecasts for GDP growth improve. Pantheon Macroeconomics thinks the OBR could raise its estimate of the size of the economy in five years’ time by 0.5 per cent or so which could, in an instant, up the fiscal headroom by as much as £10bn.
Indeed Liberum analyst Joachim Klement is scathing on the falling-debt-to-GDP rule: it only requires the government to propose a plan that sees debt falling from year five. It’s the sort of rule that encourages creative accounting and does not enforce fiscal discipline.
Failing an improvement, real or engineered, in headroom, a tax rethink could be put on hold until later in the year, closer to the election, seemingly pencilled in for autumn. There is after all time to squeeze in one final Autumn Statement.
An even bigger question than the timing of expedient tax cuts is whether they be long-lasting. What seems increasingly likely is that tax cuts will be followed by tax takeaways following the election, whichever political party is in government. With the nation carrying debt of £2.65tn, the cost of servicing it painfully high, low growth rates, the challenge of improving productivity rates and an ageing population, there are numerous bodies lining up to advise against gesture giveaways that will have to be paid for later.
The Institute of Fiscal Studies warns that the combination of high debt interest payments and low growth will make it difficult to reduce debt as a proportion of national income. Tax cuts today, it says, simply add to the risk of tax rises or spending cuts tomorrow. The IMF has urged the chancellor not to cut taxes and to focus instead on curbing public borrowing and prioritise spending on health, education and climate change. But given that growth may be the easiest way of all to clear the nation’s debt it is no surprise that tax cuts would be the Tories’ much preferred route - countries with lower taxes have more “dynamic, faster-growing economies”, Hunt commented at Davos.
The challenge of getting debt down is a difficult one. A new Labour government may not be averse to higher taxes but would want to have a real choice over how to spend those revenues. The Conservatives might be drawn to make deep cuts in spending but could be constrained by public anger over “broken” services. (The Institute for Government’s survey of public services in 2023 concluded that of 10 key services, nine were judged to be performing worse than they were in 2010.)
The consolation prize however is that any improvement in economic performance next year would then lead to an expanded headroom, making the then-incumbent chancellor’s job a great deal easier.
