As an advertising slogan, “pay more get less” has limited appeal and so Jeremy Hunt was keen to focus on other aspects of his budget as he did the customary tour of the TV and radio studios to explain the reasons behind his tax and spending decisions.
Two of Britain’s leading thinktanks felt no need for such reticence, and instead both the Resolution Foundation and the Institute for Fiscal Studies used their post-budget analysis to highlight that families are paying more in tax but getting less back from the state in return.
The pensions tax break for the 1% was in contrast to the whopping increases faced by basic rate and higher rate taxpayers as a result of a previously announced six-year freeze on tax allowances. Income tax thresholds have been frozen until 2027-28, which will mean the average basic rate taxpayer will eventually be paying £800 a year more in income tax while a higher rate taxpayer will be paying an extra £1,700.
If tax allowances don’t rise in line with earnings growth, fiscal drag means people on lower incomes have to start paying tax and more people are affected by the higher 40% rate. The IFS says that freezing the basic rate threshold at £12,570 and the higher rate threshold at £50,270 will mean 1.7 million more basic rate taxpayers and 1.2 million people dragged into the 40% band.
Fiscal drag has two big effects. Firstly, it will mean that by 2027-28 tax as a share of national income will rise to just shy of 38%. That’s a rise of more than four percentage points on its pre-pandemic level and the highest since the second world war. Secondly, paying more personal tax means people have less money so spend. Despite the slightly rosier outlook for growth, living standards are on course for their biggest two-year fall since the 1950s.
This is part of a longer-term trend that began during the global financial crisis 15 years ago. The IFS said real disposable household income – one measure of living standards – will be £25,000 by 2027, little changed on its level two decades earlier. It would be more than £10,000 higher had the trend from 1948 to 2008 continued. The UK is on course for another lost decade for living standards, according to the IFS’s director Paul Johnson.
And a new era of austerity. The chancellor announced more money for childcare and the ministry of defence in his budget, and spending on the NHS will continue to rise in real terms. Other departments face a renewed squeeze, with the Resolution Foundation calculating there will be cuts of 10% in day-to-day spending over the next five years.
Hunt says the near £400bn spent by the government mitigating the impact of the Covid-19 pandemic has made higher taxes and spending restraint unavoidable.
Torsten Bell, the Resolution Foundation’s director put it another way. “We are investing too little and growing too slowly. Our citizens’ living standards are stagnant. We ask them to pay higher taxes, while cutting public services,” he said.