Millions of workers will benefit from a 2p cut in national insurance as Jeremy Hunt began to ease the tax burden ahead of the general election.
The Chancellor said the two percentage point reduction in the main rate will save someone earning £35,000 more than £450 and the change would benefit 27 million people.
The Chancellor also confirmed that a tax break allowing firms to cut their bills if they invest in new equipment will be made permanent, in what he claimed was the “biggest business tax cut in modern history”.
But both measures come against a backdrop of a tax burden that has risen sharply in recent years as the Tories have contended with the economic impact of Covid-19 and the spike in energy prices triggered by the war in Ukraine.
The changes in the autumn statement reduce the tax burden by 0.7 percentage points compared with forecasts in March, but it still rises in every year to a record post-war high of 37.7% of GDP by 2028-29.
And high inflation has also contributed to a situation where the independent budget watchdog warned that “living standards are forecast to be 3.5% lower in 2024-25 than pre-pandemic”.
“This would be the largest reduction in living standards since records began in the 1950s, but only half the fall we expected in March,” the Office for Budget Responsibility (OBR) said.
The Government will rush through emergency legislation to cut national insurance from January 6.
Mr Hunt said high employment taxes “disincentivise the hard work we should be encouraging” as he cut the 12% national insurance rate on earnings between £12,570 and £50,270 to 10%.
“If we want people to get up early in the morning, if we want people to work nights, if we want an economy where people go the extra mile and work hard, then we need to recognise that their hard work benefits all of us,” the Chancellor said.
He said the change means that for the average nurse, it is a saving of over £520 and for the typical police officer it is a saving of over £630 every single year.
He also cut national insurance by an average £350 a year for around two million self-employed people from April.
But it comes after Mr Hunt has frozen thresholds for income tax, meaning that “fiscal drag” has meant that as people’s earnings have increased they have either been brought into tax for the first time or moved into higher bands.
Paul Johnson, director of the Institute for Fiscal Studies think tank, said: “This undoes only a small fraction of the huge tax increase resulting from the freezing of income tax allowances and thresholds.”
He said that next year the NI cut “will leave average earners slightly better off” once the freezes in income tax thresholds are accounted for but “low earners and high earners will still be worse off”.
The continuing freeze in income tax and national insurance thresholds, rather than uprating them to account for rising inflation, will result in almost £45 billion of extra revenue for the Exchequer by 2028-29.
The OBR said that between 2022 and 2029 more than four million extra individuals will be earning above £12,750, leaving them liable for income tax, three million more will move into the 40% higher rate band and 400,000 more into the top 45% rate for those earning above £125,140.
Mr Hunt said his autumn statement package will “raise business investment, get more people into work, reduce inflation” and increase gross domestic product, a measure of the size of the economy.
But while the Office for Budget Responsibility (OBR) has upgraded its GDP growth forecast this year, it has downgraded the figure for subsequent years.
The budget watchdog’s forecast in March was for the economy to shrink by 0.2% in 2023, but that has now been revised up to 0.6%.
But in 2024 growth is forecast to be 0.7% rather than the 1.8% expected at the time of the Budget, 2025 is expected to see 1.4% rather than 2.5%, and 2026 could be 1.9% instead of 2.1%.
Growth is then expected to go beyond the previous forecast, with 2% in 2027, slightly above the 1.9% predicted in March, with 1.7% in 2028.
The OBR also said it expected inflation to “remain higher for longer”, taking until the second quarter of 2025 to return to the Bank of England’s 2% target, more than a year later than forecast in March.
The national debt is now predicted to be 91.6% of GDP next year, 92.7% in 2024-25, 93.2% in 2026-27, before declining in the final two years of the forecast to 92.8% in 2028-29.
Mr Hunt said universal credit and other benefits will increase by 6.7%, in line with September’s inflation figure, ending speculation the Government could have used the cheaper October figure.
Mr Hunt also confirmed the triple-lock formula for state pension rises would be implemented as usual, meaning the state pension will rise by 8.5% in line with average earnings, worth up to £900 more a year.
But he confirmed plans for a tougher welfare regime, saying it was “wrong economically and wrong morally” that every year more than 100,000 people were signed onto benefits with no requirement to look for work because of sickness or disability.
The Chancellor said: “We will reform the fit note process so that treatment rather than time off work becomes the default.
“We will reform the work capability assessment to reflect greater flexibility and availability of home working after the pandemic. And we will spend £1.3 billion over the next five years to help nearly 700,000 people with health conditions find jobs.”
Mr Hunt said the OBR projected these reforms will “more than halve the net flow of people who are signed off work with no work search requirements”.
There will also be £1.3 billion of funding to offer “extra help” to 300,000 people who have been unemployed for over a year.
He said: “After a global pandemic and energy crisis, we have taken difficult decisions to put our economy back on track.
“We have supported families with rising bills, cut borrowing and halved inflation.
“Rather than a recession, the economy has grown. Rather than falling as predicted, real incomes have risen.
“Our plan for the British economy is working. But the work is not done.”
In other announcements, Mr Hunt:
– Froze alcohol duties until August 2024.
– Promised £7 million over three years for organisations to tackle antisemitism.
– Extended 75% business rates relief for retail, hospitality and leisure until 2025.
