The Institute for Fiscal Studies (IFS) has warned the UK government against slashing taxes until it provides more detail on its spending plans. According to the IFS, there is limited room for Chancellor Jeremy Hunt to announce tax cuts in the upcoming Spring Budget due to record-breaking increases in tax revenues. The report suggests that the economic case for another significant net tax cut is weak, as Britain’s tax burden is set to increase by £104 billion in 2028-2029 compared to five years ago.
One of the major contributors to this tax burden increase is the freeze in personal direct tax thresholds and the corporation tax hike implemented last year. The IFS advises the government to refrain from providing detail on tax cuts until the spending review reveals more information on spending plans.
The report also highlights the growing population as a factor that will impact the size of the economy and put pressure on public spending. The latest population projections indicate an average annual growth in real-terms spending per capita of just 0.2 percent, lower than the previous estimate of 0.5 percent by the Office of Budget Responsibility. The IFS cautions against ignoring the additional pressures a larger population will place on public services, such as healthcare and local government.
Martin Miklos, a research economist at the IFS, urges Mr. Hunt not to cut back provisional spending plans for the next Parliament to create space for tax cuts. The net debt of the public sector is predicted to barely fall in five years’ time, and growing pressures on healthcare spending, pensions, and the transition to net zero will only amplify public finance challenges in the future. Considering these factors, the IFS concludes that the case for further tax cuts is weak.
However, if the chancellor is determined to reduce taxes, the report suggests slashing stamp duty on property and share purchases as a better option than cutting income tax rates, inheritance tax, or national insurance contributions. Mr. Hunt has been considering a “vaping products levy” and a 1 percent cut in employee national insurance, but these moves would cost the economy around £4.5 billion annually.
The IFS estimates Mr. Hunt’s fiscal headroom at £13 billion, leaving him with £6 billion in reserve. Nevertheless, the historically high rate of inflation has heavily affected the Treasury’s room to maneuver. The state of the economy will be a challenging issue for the next government ahead of the looming general election.
The UK’s public sector net debt remains at levels last seen in the early 1960s, standing at £2.68 trillion or around 97.7 percent of GDP. Given the country’s higher spending needs and the importance of securing a stable debt to GDP ratio, the International Monetary Fund advises against further tax cuts.
In conclusion, the IFS report highlights the limited opportunities for government spending reductions due to an unprecedented tax burden. It cautions against slashing taxes without providing more detail on spending plans and emphasizes the weak economic case for further tax cuts. The report suggests alternative options such as reducing stamp duty on property and share purchases but advises against cutting income tax rates, inheritance tax, or national insurance contributions. With limited fiscal headroom and historical levels of public sector net debt, it is crucial for the government to carefully consider its approach to taxation as it navigates the challenges of the upcoming Spring Budget and general election.
