Hunt’s stealth taxes prove he is no conviction chancellor
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Jeremy Hunt last week delivered the biggest personal tax cut since the 1980s. By reducing employee National Insurance contributions from 12pc to 10pc, the Chancellor’s Autumn Statement was designed to put “clear blue water” between the Tories and Labour ahead of the general election.
This was, said Treasury spin-doctors, “the deepest personal tax cut since Nigel Lawson slashed tuppence off the basic rate of income tax in 1988”. Inviting comparison with Margaret Thatcher’s chancellor, Hunt mentioned Lawson in his speech, while including other references to the late 1980s.
Back in March, Lawson invited me to his home in Eastbourne, where we had lunch and recorded an interview. Having bestrode the Treasury from 1983 to 1989, he remained well capable of driving a headline – even aged 91.
This turned out to be Lawson’s last interview – he told me as much as we recorded. The former chancellor died just a few weeks later. And since Hunt delivered last Wednesday’s “tax-cutting” statement, I’ve been mulling what his widely admired predecessor would have made of it.
It is no exaggeration to say that Lawson’s enterprise-boosting policies during the 1980s rescued Britain from the statist torpor of the previous decade. The macroeconomic architect of Thatcherism, he championed growth-boosting, “supply-side” reform – reconfiguring economic policymaking and laying the groundwork for the prosperity of the 1990s.
How does today’s Chancellor compare?
Impacting around 27 million workers, Hunt’s flagship NIC reduction, to be introduced in January, amounts to a £10bn tax cut by 2028. Those on an annual £35,000 salary – close to the UK full-time average wage – will be £450 a year better off. That’s less than £9 a week –which, in some pubs, might still buy you a couple of pints. Hardly pulse-racing stuff.
What’s more, this eye-catching tax cut is more than offset by the ongoing freeze of the personal allowance –which will remain at £12,570 per annum for the next five years. The income thresholds at which the 20pc basic rate rises doubles to 40pc then 45pc – £50,271 and £125,140 respectively – will also stay frozen until 2028.
Inflation and annual wage rises mean fixed allowances and thresholds pull more and more people into higher tax brackets, of course, even if their wages stay the same in “real” – that is, inflation-adjusted – terms.
This insidious process of “fiscal drag” means four million more low-paid workers will be paying income tax by 2028, says the Office for Budget Responsibility. Three million more will become higher-rate taxpayers – including countless mid-ranking managers, teachers and health workers, who should never be taxed at 40pc.
In sum, fiscal drag increases government revenue by no less than £44.6bn by 2028. So this massive stealth tax increase is worth well over four times the much trumpeted £10bn NIC cut.
Grabbing £44.6bn per year by stealth is equivalent to raising the basic rate of income tax by no less than seven pence in the pound. If the Government did that, British politics would be upended.
Yet fiscal drag explains why the UK tax burden – government revenue as a share of GDP – is heading for 37.7pc over the next few years, up from just 32.3pc in 2010 and 33.1pc in 2019. After 13 years of Tory-led government, Britain is more heavily taxed than at any time since the 1940s.
With the direction of travel clear back in March, I asked Lawson what he thought of such a large tax burden. “Certainly undesirable and unsatisfactory,” he told me – and Hunt’s measures have since pushed up taxation even more.
Pre-empting last week’s statement, Lawson said he “couldn’t see the Conservatives bringing the tax burden down any time soon”. While describing Rishi Sunak as a “good guy”, he said of the Prime Minister: “I don’t think he will be known for his tax cutting.”
Ministers point to Hunt’s other flagship tax cut – “full expensing”, allowing businesses to offset investment in machinery and equipment against their tax bills. Originally introduced by Hunt for three years, it was last week “made permanent” – a business tax cut worth £9bn, according to the Treasury.
Although welcome, full expensing won’t be of much immediate use to countless small and medium-sized enterprises – companies generating half the UK’s GDP and two-thirds of all jobs. While big companies can use their strong balance sheets to raise funds to invest, taking advantage of the tax break, many SMEs, after the traumas of lockdown and the cost of living crisis, remain on life support.
Corporation tax “should definitely stay at 19pc”, Lawson told me in March, but Hunt anyway raised it to 25pc in his budget later that month, the first increase in half a century. He kept it there last Wednesday, despite calling for a 15pc rate when campaigning to be Tory leader and arguing for 12.5pc prior to that.
Lawson’s track record could hardly be more different. Corporation tax was no less than 52pc when he became chancellor. Over just six years, he slashed it to 35pc – a massive 17 percentage point reduction.
Hunt deserves credit for the earmarking of £4.5bn of strategic funding for automotives, aerospace, clean energy and life sciences – sectors in which Britain has a comparative advantage. It was also useful to extend business rates relief for some SMEs – but he should have tackled onerous IR35 regulations, which penalise the UK’s army of self-employed.
Lawson slashed income tax by 2pc not only in his 1988 budget, but in 1987 as well. And, far from freezing the starting threshold, he raised it – by more than double the rate of inflation. That’s what conviction politicians do.
“The Government has no income of its own other than what it raises via taxation or the deferred form of taxation known as borrowing,” wrote Lawson in his memoirs. It’s a view today’s Tory leadership often quotes but seems not to have grasped.
Watching Sunak and Hunt from afar, Lawson told me he didn’t “hold out much hope” of fundamental change.
“I don’t think there’s anything new to come from the Conservative Party as it now is,” he said. “It’s going to have to reinvent itself – and I don’t see that happening any time soon”.
Follow Liam on Twitter @liamhalligan
