Do the Numbers Stack Up?

by Danny Clifford

The Chancellor spent a considerable proportion of this Autumn 2021 Budget making substantial spending pledges. Often such spending pledges are accompanied by tax increases.

However, the (natural) fear of tax increases now overlooks several key points.

First, big tax rises have already been announced.

The 1.25% increase in National Insurance (and dividend income) is forecast to raise £36bn over the next three years.

Going back further, before the March Budget the OBR projections for the economy (and in particular borrowing) were particularly gloomy. The Chancellor therefore took action and the March Budget announced a freezing of tax allowances and bands until April 2026 amounting to a significant increase in tax over the interim years. Note that with inflation now expected to average 4% over the next year, the effect of freezing of allowances and tax bands will bring in considerably more than would have been anticipated when the measure was announced.

In fact, the OBR forecast has proven to have been overly pessimistic. By way of example, borrowing in 2024/25 is now anticipated to be lower as a proportion of GDP than it was prior to the pandemic. Unemployment, which was feared to reach 12% is now forecast to peak at about half that.

This means that, while the economy is not in good shape, it is in a considerably better state of health than was feared even 6 months ago when the March Budget measures were announced.

That has given the Chancellor room for manoeuvre.

The Chancellor could have used this to ease the tax burden, but instead has chosen to use this ‘bonus’ to reinvest, aiming to stimulate growth and productivity over the coming years. If the economy can grow, the tax take increases and borrowing, as a proportion of GDP, falls.

Finally, the overall tax burden is at its highest level since 1949. This is something of an ideological problem for a Conservative Chancellor.

Clearly the high tax burden is largely the result of the Covid pandemic. However, last year the State accounted for 50% of the total UK economy. That will not sit comfortably with the Chancellor.

The Chancellor has been under pressure from his own party over this high tax burden and further tax rises would have created even greater issues within his own party.

Therefore, the Chancellor had no need, and no desire, to further increase tax. Indeed, he indicated that he would like to lower the tax burden by the end of this Parliament. Keeping the tax burden high now and bringing down borrowing may well enable him to do that.

Author

Danny Clifford

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