Jeremy Hunt cut national insurance in a giveaway worth £10 billion a year, but millions of workers will face a squeeze on their finances with the tax burden still set to reach a record high.
The Chancellor said the two percentage point reduction in the main rate of employees’ national insurance (NI) will save someone earning £35,000 more than £450 and the change would benefit 27 million people.
With a general election expected next year, the tax cut will be rushed through Parliament to take effect in January to boost Rishi Sunak’s chances at the ballot box.
But the continuing freeze in personal tax thresholds will wipe out the benefit for many workers, as higher earnings see millions dragged into paying more to the Exchequer.
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”.
The full expensing regime – which means that for every £1 spent on qualifying investment a firm can cut their tax bill by up to 25p – will be worth almost £11 billion to businesses in 2028-29.
Both measures come against a backdrop of taxes that have 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 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.
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 a saving of over £520 for the average nurse and £630 for the typical police officer.
He also cut national insurance by an average £350 a year for around two million self-employed people from April.
But the freeze in personal tax 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 as a result of “fiscal drag”.
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.
Paul Johnson, director of the Institute for Fiscal Studies (IFS) think tank, said the NI change “undoes only a small fraction of the huge tax increase resulting from the freezing of income tax allowances and thresholds”.
The IFS said the changes “give back less than £1 of every £4 that is being taken away” from households through changes to NI and income tax announced since March 2021.
Liberal Democrat leader Sir Ed Davey said: “This autumn statement was a Hunt hoax. Buried in the small print is a massive stealth tax raid that will drag millions into paying a higher rate in the coming years.”
The OBR’s forecasts painted a mixed picture about the health of the economy.
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 growth of 0.6%.
But it downgraded forecasts for the following three years, with GDP now expected to grow by 0.7% next year, with 1.4% in 2025 and 1.9% in2026.
The OBR also said inflation was “expected to be more persistent and domestically fuelled than we previously thought” and is not expected to return to the Bank of England’s 2% target until the first half of 2025, more than a year later than in March.
It is high inflation – fuelling increased earnings and prices and subsequently larger tax takes – which contributed to the £27 billion windfall which Mr Hunt has used in part for the giveaways announced in his statement.
Allies of Mr Hunt insisted the tax-cutting plan was not a pre-election bribe but its timing is not being viewed as a coincidence in Westminster.
Westminster watchers saw the decision to bring forward the cut to the main rate of employees’ NI from April to January as a possible signal that an election could be called in early 2024.
But the Chancellor told Sky News he had not spoken to the Prime Minister about the prospect of a May election.
Mr Hunt told the broadcaster he would look to cut income tax at the spring budget “if it is responsible to do so” and that he had “never pretended” that he could lower the tax burden “in one go” — a potential hint at a further pre-election giveaway.
Spending the proceeds of higher inflation while not significantly increasing the budgets available to Whitehall departments means they could face a dramatic spending squeeze in the years after the election.
“Despite an increase of £4.1 billion a year on average in this autumn statement, higher inflation means the real value of departmental spending is £19.1 billion lower by 2027-28 than our March forecast,” the OBR said.
In other policy measures, Mr Hunt:
– Increased universal credit and other benefits by 6.7% from April, in line with September’s inflation figure, ending speculation the Government could have used the lower October figure.
– Maintained the triple-lock policy on state pension increases, meaning an 8.5% rise worth up to £900 from Apr 2024.
– Increased local housing allowance rate to give 1.6 million households an average of £800 of support next year.
– Promised tough welfare reforms, saying it was “wrong economically and wrong morally” for 100,000 people a year to be signed off sick and not required to look for work.
– Froze alcohol duties until August 2024.
– Said the Government could sell its shares in NatWest to the general public.
Mr Hunt told MPs: “We are delivering the biggest business tax cut in modern British history, the largest ever cut to employee and self-employed national insurance and the biggest package of tax cuts to be implemented since the 1980s.
“An autumn statement for a country that has turned a corner.”
But shadow chancellor Rachel Reeves said: “We were told to expect an Autumn Statement for growth. But growth has been revised down next year, the year after, and the year after that too.
“What has been laid bare today is the full scale of the damage that this Conservative government has done to our economy over 13 years.
“And nothing that has been announced will remotely compensate.”
