Do people really want tax cuts if that means poorer public services

21 January 2022

Having weathered the storms whipped up when he broke key tax commitments from the Conservative party’s 2019 manifesto, it is hardly surprising that the Chancellor has subsequently sought to signal which taxes he plans to cut, and by how much, before next general election.

Options to reduce taxes

Three possibilities for tax cuts are being talked about.

  • First, a 1 per cent cut in the basic rate of income tax to 19 per cent in 2023/24, followed by a further 1 per cent cut to 18 per cent in 2024/25. This might even be accompanied by the abolition of the 45 per cent top rate of income tax.
  • Second, an increase in the inheritance tax nil rate band.
  • Third, a reduction in VAT on energy from renewable sources.

At one level this makes perfect sense from the Government’s perspective. The tactic holds out the prospect of jam tomorrow for an electorate that is weary of restrictions and hardships, and hungry for some good news. More specifically, it may mollify some voters whose trust in it may have been shaken by a range of unforced errors and unwelcome headlines from sleaze to Downing Street parties. That, in turn, might also mitigate the damage to the Government at forthcoming by-elections.

However, while these proposals are easy to present, they risk creating problems of their own. For example, having added to the tax burdens of workers by imposing the health and social care levy, the Chancellor is likely to receive sharp criticism if he goes on to reduce income taxes in a regressive way which ultimately leaves lower-paid workers relatively worse off overall, and higher-rate taxpayers and investors comparatively better off.

Balancing the books

With economic growth unlikely to fill the gap for the Chancellor, he will also be challenged to answer the obvious question: how will the tax cuts be paid for? We’re talking big numbers here. Cutting 2p off the basic rate of income tax would cost £12bn. Looking back over recent Conservative budgets, Treasury figures point to only three tax changes which might raise that sort of money by the end of this parliament.

First, the health and social care levy. That can be disregarded for these purposes as it is intended to be ring-fenced to achieve its stated purpose. Next is the freeze on personal allowances and the higher rate income tax threshold up to and including 2025/26. In the two years for which the Chancellor is holding out the prospect of tax cuts, that freeze will bring in more than £17bn to the Treasury. Third, the increase in corporation tax rates will yield an extra £28bn in those two years.

Unless they are funded by borrowing, the tax cuts being contemplated will therefore be paid for either by bigger tax bills for companies and/or from extra taxes generated from frozen allowances and thresholds – money with your name on it, as the saying goes.

At what cost?

UK tax receipts may have reached a historic high, but many voters recognise that the amounts they pay are still not sufficient to fix the roads, reform and fund the NHS, sort out policing and delays in the judicial system, get education back on track and address the climate emergency. If the Chancellor is hoping that in 2024 people will accept a modest tax cut instead of proper services, he is taking a huge gamble.

For more information, please get in touch with David Barton, or your usual RSM contact.