A senior official previously tasked with reviewing the Treasury Department’s plans told BBC Chancellor Rishi Sunak he could afford to postpone April’s tax hikes.
Sir Charlie Bean, who recently left the Office of Budgetary Responsibility, said the plan for immediate promotion was more political than economic.
April’s Social Security hike will tax the average worker £250 a year and raise costs for companies hiring.
The Chancellor is sticking to the reduction of the deficit.
Mr Sunak said this would require “hard work, prioritization and a willingness to make difficult and often unpopular arguments elsewhere”.
But Sir Charlie said: “There is no problem in the UK borrowing several billion pounds for an extra year.
The increases break a manifesto promise and mean the highest tax burden since the 1950s. Critics also include members of Rishi Sunak’s own party: MP Sir John Redwood fears the hikes could ‘strain’ the recovery.
He is among those who have stressed that the deficit has been closing faster than expected anyway thanks to a stronger recovery in employment recently.
- You can hear more about this on Radio 4’s analysis program ‘Can the UK ever be a low-tax economy again?’. Circa 2030 on March 14 and on BBC Sounds
Mr Sunak had envisioned this as a payback period – after a bailout plan that protected most livelihoods from the ravages of the pandemic caused the largest peacetime deficit.
He wants to restructure the public coffers and tackle legacy issues. He presented the hikes announced last fall as a payment with a purpose, stating: “Every pound of the levy will go directly to health and social care.”
But Mr. Sunak had not foreseen the magnitude of the cost-of-living crisis. As the war in Ukraine drives up fuel prices, inflation could hit a 40-year high.
According to some analyses, household living standards could fall by £1,000 a year.
And that’s without the tax hikes in April.
But the chancellor is standing firm – so far.
Raise taxes now, he argues, and he can deliver sustainably lower taxes for years to come — and avoid escalating interest payments on government debt.
Can he still deliver those future cuts?
Economists say a tried-and-true sweetener, a cut in the main tax rate, could be affordable ahead of the election. But he may have to raise money elsewhere.
Many are noting that with upward leveling and net zero on the agenda, government could take a more relaxed view of state size and a more interventionist role. The public coffers are not immune to inflation either: money earmarked for services does not go as far as expected.
Meanwhile, says Sir Charlie, demographics could thwart intentions.
“It’s not just people who are living longer, it’s also technological advances in the healthcare sector and the demand is so great that when these treatments are available to keep people alive longer, people will want them.”
“And it is reasonable to assume that the rising trend in spending on health and social care and pensions will add around £75bn more in spending over the next five years, potentially £150bn over the next decade.”
Can that be offset by depressing spending elsewhere?
Lord Macpherson, Secretary of State at the Treasury until 2016, is skeptical.
“A lot of the low-hanging fruit in the public sector has been effectively picked [former chancellor] George Osborne,” he says. “So there’s just no room for cuts in programs like the police, prisons and local government.”
In the post-war years, governments also managed to increase health spending without seeing tax burdens skyrocket through cuts in areas such as defense spending – but the war in Ukraine is putting renewed pressure on this area.
Could social spending provide an answer?
By this year, the state pension should increase by the lower of inflation, average wage growth, or 2.5%. That triple lockdown has been temporarily suspended, breaking another manifesto promise after the economic distortions caused by Covid made them prohibitively expensive.
Economist Dame DeAnne Julius, previously on the Bank of England’s Monetary Policy Committee, is asking if she can be reinstated.
“In the last 10 years since it was introduced, pensions have grown much faster than income or inflation. So that’s a ratchet we really can’t afford.”
Even so, taxes may need to raise more money. But by whom? Tapping into the wealthiest may be attractive, but DeAnne Julius points out that “the top 10% of earners actually pay 60% of income tax revenue.” She prefers CO2 taxes.
Lord Macpherson says only the big three: income tax, social security or VAT can make any serious money.
But George Osborne’s difficulties with the so-called pasty tax show how difficult it can be to levy one.
There are no easy answers.
Chancellors pray for faster growth that will automatically refill the coffers. But often they were disappointed – or faced big curveballs.
The messages from Health and Social Care Levy were: If you want more services, you have to pay. That will likely be reflected in more difficult conversations with voters
As the clock ticks towards the spring declaration, Rishi Sunak may wish to soften the blow of immediate tax hikes. After all, they could harm not only households, but growth as a whole and thus also public coffers.
Ultimately, payments that are meant for a cause can backfire simply because of unfortunate timing.
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