28. 02. 2024

Weak economic case for Budget tax cuts, says IFS 

Weak economic case for Budget tax cuts, says IFS 

The Institute for Fiscal Studies (IFS) has said the Chancellor should ‘tell us where the spending cuts will fall’ if tax cuts go ahead at the Budget

At a pre-Budget briefing, the IFS argued that there was ‘only a weak economic case for another sizeable net tax cut’ next week, despite the record tax burden.

With UK taxes approaching a record high, the Chancellor is facing mounting pressure from backbenchers to cut taxes, but there are concerns about how this will affect public spending and which areas will feel the backlash of tax cuts.

At a pre-Budget briefing, the IFS warned that population growth, driven by higher than expected net migration, would raise revenues, it would also impact current spending plans. With public service spending set to grow by 0.9% in 2025-26 this would be equivalent to growth of spending per person of 0.5% a year. With the population growing as it is, this would fall to 0.2%.

To keep in line with these figures, public services would have to receive a further £20bn from 2028-29, this increases to £25bn in spending per person terms. Rumours of Jeremy Hunt cutting public services growth to 0.75% would add £3bn to the tax cuts, according to the IFS.

The Chancellor has a fiscal rule to get debt falling in the fifth year of the forecast period. The IFS warned: ‘While aiming to have debt on a falling path in the medium term is commendable, this is a badly designed rule.

‘The Chancellor appears to be gaming his own fiscal rule. By pencilling in unspecified spending cuts towards the end of the period, he appears to meet the rule, but he is doing so in a way that will lack credibility and transparency until he tells us where he intends to find those cuts.’

The IFS is also calling for tax reform of stamp duty land tax on purchases of properties and shares, but rejects the clamour for cuts to inheritance tax.

Martin Mikloš, research economist at the IFS, said: ‘In November’s Autumn Statement, the Chancellor ignored the impacts of higher inflation on public service budgets and instead used additional tax revenues to fund eye-catching tax cuts. 

‘At next week’s Budget, he might be tempted to try a similar trick, this time banking the higher revenues that come from a larger population while ignoring the additional pressures that a larger population will place on the NHS, local government and other services.’

This year is set to be record-breaking in terms of tax take, but any tax cuts would not change this, as it is currently set to be ‘£66bn higher than they would have been had their share of national income remained at its 2018–19 level,’ said the IFS. Frozen thresholds and the increase in corporation tax are the main drivers.

With thresholds frozen for another four years, the tax take will continue to rise and by 2028-29 the annual additional tax will be £104bn more than 10 years earlier.

Borrowing in 2023–24 is now on course to be £113bn, which would be £11bn below the £124bn forecast by the Office for Budget Responsibility in the November 2023 Autumn Statement.

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