Britain will go into the next general election with taxes at their highest level since 1948 despite Jeremy Hunt’s 2p budget cut in national insurance contributions – with the threat of a fresh squeeze on public spending to come after polling day.
The chancellor used a combination of higher borrowing and a range of stealth taxes to fund a £14bn giveaway package and said his ambition was to phase out NICs for employees and the self-employed altogether.
But the lack of any real surprises in the budget – other than an increase in the child benefit threshold to £60,000 – appeared to reduce significantly the prospect of a snap general election in May, when the UK will still officially be in recession.
Many Conservative MPs had hoped for a headline-grabbing budget that would finally leave people feeling better off and help to close the gap with Labour in the polls, acting as a launchpad for the election later this year.
However, living standards remain squeezed and millions of people face being dragged into higher tax bands, while the Office for Budget Responsibility (OBR) showed that incomes are likely to remain below their level at the last general election, in 2019, at the end of this parliament.
Hunt’s heavily trailed 2p cut in national insurance will be funded by scrapping non-dom rules – a flagship Labour policy – and other revenue-raising measures that will push taxation to the highest level since the second world war.
“We will continue to cut national insurance contributions as we have done today so we truly make work pay,” Hunt told MPs. “We stick to our plan with a budget for long-term growth; it delivers more investment, more jobs, better public services and lower taxes.”
Labour, however, accused the Conservatives of having overseen 14 years of economic failure. Sir Keir Starmer, the party leader, called the budget “the last desperate act of a party that has failed”.
He added: “An economy smaller than when the prime minister entered Downing Street – the textbook definition of decline – that is their record. I mean, after 14 years, who do they actually think feels better off?”
Experts said the £900-a-year tax cut for the average worker from the NICs cuts in the budget and last year’s autumn statement would be dwarfed by tax increases previously announced.
Paul Johnson, the director of the Institute for Fiscal Studies thinktank, said: “Come the election, tax revenues will be 3.9% of national income, or around £100bn, higher than at the time of the last election. This remains a parliament of record tax rises.”
Hunt raised money through a number of small tax increases, on vaping, tobacco, holiday home lets, business class flights and non-doms. That allowed him to meet his fiscal rule – to reduce debt as a share of GDP in five years’ time – by what the OBR described as the “historically modest margin” of £9bn.
Hunt also announced the extension of a windfall tax on oil and gas companies, which had led to reports of a “heated” row with Douglas Ross, the Tory leader in Scotland.
Hunt’s decision to axe the tax breaks for foreign nationals who live in the UK and who do not pay UK tax on their overseas income and gains is a significant U-turn that mirrors Labour policy and blows a hole in the opposition’s spending plans. The chancellor said this was because he believed “those with the broadest shoulders should pay their fair share”.
Labour had planned to use the £2.7bn raised from scrapping non-dom status for public services including the NHS, leaving the party facing a choice of dropping plans or finding money elsewhere.
Starmer said Labour would back the national insurance cut, leaving him the option of raising other taxes to pay for his spending plans, or dropping them altogether.
The decision to prioritise tax cuts will, however, mean imposing a tougher austerity drive on government departments at a time when public services are crumbling, with elevated NHS waiting lists and councils facing bankruptcy.
Heralding a fresh austerity drive pencilled in for after the election, the government’s economic and spending watchdog, the OBR, said Hunt’s plans meant funding for non-ringfenced government departments – including local government and prison services – was on track to fall by 2.3% per year.
The chancellor said the tax cuts were part of a plan to create a high-wage, high-skill economy – and that the sort of growth that would lead to higher living standards could not come from “unlimited migration”.
Yet the OBR said it had raised its 2028-9 forecast for net migration from 245,000 to 315,000 a year since last November’s autumn statement.
Noting that the medium-term outlook for the economy remained challenging, the OBR said: “One of the biggest changes to our economy forecast is an increase in the size and growth of the UK population. But higher and rising levels of inactivity offset its impact on the overall size of the workforce, leaving our forecast for the level of GDP in five years virtually unchanged from the autumn, and the level of GDP per person slightly lower.”
The OBR revised up its growth forecast for 2024 from 0.7% to 0.8% and its estimate for 2025 from 1.4% to 1.9%, but pencilled in unchanged or slightly lower growth figures for the following three years.
Despite the cumulative 4p off NICs announced in the budget and the autumn statement, the OBR said taxes as a share of national output would still be at a postwar record at the end of its five-year forecast. Tax was 33.1% of gross domestic product before the Covid 19 pandemic but is on course to be 37.1% of GDP by 2028-29.
Torsten Bell, chief executive of the Resolution Foundation thinktank, said: “The tax cuts announced today to sweeten the government’s election pitch rely on the prospect of a sour £19bn of post-election tax rises, and the fiscal fiction that another £19bn of cuts to public services can be delivered in a spending review that the Treasury today confirmed will not take place until after polling day.
“For all that, the big picture has not changed at all with this budget. Britain remains a country where taxes are heading up, not down – rising by the equivalent of £3,900 per household – and where incomes are set to remain below their level at the last general election when voters return to the polls.”
“This didn’t feel like a pre-election budget,” Tory former minister Stephen Hammond said. “Pretty much everything had been trailed. There were no rabbits today, so from a purely political point of view, I think this still plays back into the narrative that it’s an autumn election.”
Hunt briefed Kristalina Georgieva, the head of the International Monetary Fund – which had warned against budget tax cuts – about his plans.
An IMF spokesperson said Georgieva “acknowledged the UK authorities’ efforts to navigate complex economic challenges through policies to support growth while stabilising debt. IMF staff will be analysing the announced policies in greater detail, but the aim to continue the fiscal consolidation pursued since November 2022 to reduce inflation and stabilise debt is welcome.”
