Rishi Sunak will deliver today’s Spring Statement amidst a difficult economic backdrop, with excessive government spending off the back of the pandemic and rising inflation exacerbated by the war in Ukraine. Meanwhile National Insurance is being hiked, income tax rates frozen, and council tax is on the up, squeezing household budgets further. This is the Chancellor’s opportunity to demonstrate how he will both tackle the cost of living crisis and bring the public finances back into line.
Top of his priority list is the impact inflation is having on the prices of essential goods. The most powerful tool he has at his disposal here is limiting the burden from taxes. Cutting, scrapping or deferring rises is the simplest way to ensure taxpayers keep more of their own money.
However, the Government seems intent on pressing ahead with its damaging rise in National Insurance, aiming to raise an additional £12bn a year from the levy. This is sadly typical from a Treasury traditionally obsessed with how much receipts change in a given year, rather than the long-term effects of tax changes.
At the core of this issue is how Whitehall predicts the impact of its fiscal actions. Currently, this is done statically, looking at how much a tax rise will raise or cost the Treasury, but does not take into account the real-world economy. In this sense it is detached from reality. Tax changes have an impact beyond the amount they can raise in the short term.
This is what the TaxPayers’ Alliance’s new dynamic tax model sets out to demonstrate. By considering the impact of tax changes on the economy, we can use the model to predict the effect it will have on growth, investment, wages, and jobs in the long run. Our model predicts that the National Insurance hike will cost the economy £24bn over ten years and result in £6bn of investment. As a result, two thirds of the amount expected to be raised by the tax rise could be lost through lower growth.
And it wouldn’t just impact the wider economy, but people’s pockets too, with wages forecast to be £5 per week lower in cash terms than they would be without the hike. Far from helping them with the cost-of-living crisis, the hike means taxpayers will be left to pay twice through higher taxes and lower wages.
A shift in thinking towards the long term impacts of lower taxes would not only save money for taxpayers, but would also yield bigger receipts and spur growth. Then-chancellor George Osborne used similar modelling to map the impact of corporation tax cuts, which led to revenues increasing from £36 billion in 2010 to over £50 billion.
Why is this the case? Because the Laffer curve is real. Endlessly increasing tax rates on individuals and businesses harms the economy over time. Higher taxes hit investment and the number of jobs, ultimately having the reverse effect and lowering the Treasury’s revenues. Whereas cutting taxes to the optimal rate stimulates the economic incentives to invest and create jobs, all of which sees more receipts.
Yes, it can be difficult for politicians to be seen to cut taxes at such a challenging time, with debt interest payments going through the roof and the colossal cost of Covid to pay off. But who would complain if taxpayers keep more of their own hard-earned money while government pursues sensible savings in public spending? While many in Westminster seem happy with the new high-spend status quo, working taxpayers understand that the Covid crisis is coming to an end, and so too should government profligacy.
When the Chancellor stands up at the despatch box, he has an opportunity to be the fiscal conservative he says is. The Spring Statement is his chance to shift thinking away from short-term revenue-raising, and set out policies which limit public spending and go for growth. If Rishi really is a tax-cutting Chancellor, then now is his time to prove it.
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