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Chancellor plots tax rises to fill £50 billion black hole in public finances

01 Nov 2022 4 minute read
Jeremy Hunt, Chancellor of the Exchequer

The Prime Minister and Chancellor Jeremy Hunt on Monday agreed to freeze the thresholds at which people start to pay the different rates of income tax and national insurance, according to The Daily Telegraph.

Mr Hunt is looking to fill the shortfall through a combination of 50% tax rises and 50% public spending cuts in his Autumn Statement of November 17, the paper said.

It quoted a Treasury source as saying: “It is going to be rough. The truth is that everybody will need to contribute more in tax if we are to maintain public services.

“After borrowing hundreds of billions of pounds through Covid-19 and implementing massive energy bills support, we won’t be able to fill the fiscal black hole through spending cuts alone.”

The warning came as the Resolution Foundation think tank said Mr Sunak and Mr Hunt face an “unpalatable menu” when it comes to rebalancing the nation’s finances.

Liz Truss

With a deteriorating economic outlook and the legacy of last prime minister Liz Truss’s disastrous mini-budget as a backdrop, it suggests the Government will need to find at least £40 billion – likely through a combination of tax rises and spending cuts.

The think tank said the Office for Budget Responsibility could predict a recession next year, with GDP forecasts cut by up to 4% by the end of 2024.

Unemployment could also rise by around half a million, the report suggests, with the weaker economic outlook bringing borrowing up by around £20 billion a year by 2026-2027.

“The Government has a little over two weeks to finalise its plans to repair its economic credibility and the sustainability of the public finances,” said James Smith, research director at the Resolution Foundation.

“While the recent focus has been on conditions improving post-Trussonomics, the central picture remains one of a weaker growth, higher borrowing costs and expensive tax cuts that have left a fiscal hole of at least £40 billion to fill.”

According to the report, the Government may struggle to meet its fiscal rules of reducing the debt-to-GDP ratio in the medium term and deliver a current-budget balance unless “significant further policy action is taken”.

Options

Among the “menu” of options open to the Chancellor are cuts to investment spending, a move the Resolution Foundation said could save £10 billion but also have a detrimental impact on growth.

The think tank also suggests the Government could try to choose the so-called “austerity option”.

Such a move would require cuts to already-squeezed department budgets.

“With inflation at its highest level for 40 years, Government departments are already seeing their budgets fall in real terms by around £22 billion by 2024-25. It is hard to see how the Treasury could credibly save more than £20 billion by announcing cuts to day-to-day public service spending,” the think tank said.

The Resolution Foundation study suggests the new administration could save £9 billion by choosing not to raise benefits and pensions in line with rising prices next year.

It said any such move would have a “huge” impact on those struggling, with a low-income working family with two children losing around £750 and a pensioner £342.

One option open to the Prime Minister and Chancellor would be to “go full circle” on the mini-budget by reinstating the health and social care levy – a move that would raise £15 billion by 2026-27.

Freezes

Around £2 billion could also be raised by extending the “stealth” freezes in income tax thresholds by a further year to 2026-27.

Mr Smith said the lesson from history is public investment projects are likely to face cuts.

“History tells us that this will involve cuts to public investment, which are easy to announce but reduce growth in the longer term,” he said.

“Further austerity for public services is also likely, but there are limits to how big these can credibly be, as public services are already facing cuts of £22 billion thanks to high inflation.

“This reality means that the Autumn Statement is likely to involve tax rises, not just spending cuts.”


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Frank
Frank
1 month ago

The government could always ask BP and other energy companies for a loan considering they are currently racking in the cash.

The Original Mark
The Original Mark
1 month ago

Why don’t these think tanks suggest taxing unearned income, closing the loopholes that enable individuals to stash millions offshore, stop awarding government contracts to companies that are registered offshore, claw back the billions that were fraudulently claimed/awarded in dodgy covid contracts. Leave the lower rates of tax alone or even lower them, it’s been proven time and again, the more money the working person has the more they spend, austerity is a political choice and has never worked whenever it’s been used.

Frank
Frank
1 month ago

You have to remember that lots of government ministers and MPs are heavily invested in lucrative companies. If a windfall tax was imposed on these companies the shareholders, ministers and MPs, would suffer losses. That is why government is slow to do the right thing. They are in a position to protect their investments.

hdavies15
hdavies15
1 month ago
Reply to  Frank

Spot on there Frank. You could have gone on to mention that politicians and particularly ministers go on to nice non exec roles with these big corporations once they quit being an M.P. If they manage to get placed in the Lords then the fees and other cushy appointments become even more rewarding. Lush, innit?

Mab Meirion
Mab Meirion
1 month ago

The new chancellor could start with recovering the billions the previous chancellor ‘misplaced’ before he became the new Prime Minister…

Kerry Davies
Kerry Davies
1 month ago

Shell are reported to be paying £700M in windfall tax which is heralded as marvellous. In Norway that would be £839M and Norway has 8% of the UK population. Per capita the UK resident gets £10.60 and the Norwegian gets £155.37.

The Original Mark
The Original Mark
1 month ago
Reply to  Kerry Davies

And don’t forget how Norway invested their surplus income from North Sea oil means that they’re now one of the wealthiest countries in the world, and how Thatcher according to Heseltine “squandered the windfall” on short term consumerist policies. I believe Norway’s gdp per capita is over double that of the UK. That’s the tories for you, party before country always.

Ernie The Smallholder
Ernie The Smallholder
1 month ago

If a government wants to raise revenue with minimum economic slowdown or recession then increasing the tax rate on annual incomes of above £120,000 is the less damaging thing to do, not freezing thresholds on the lowest bands, nor increasing VAT rates, nor increasing corporation tax above the G7 average. If a government wants to give tax cuts then increasing thresholds, particular taking lowest threshold where people begin to pay taxes is the most effective and it would benefit all and that will feed through to the whole economy. In the last 22 years, the Conservatives have proven themselves to… Read more »

Y Cymro
Y Cymro
1 month ago

The Conservatives have been in power for nye on 13yrs and cannot continually blame Covid or the war in Ukraine to cover up their political & economic c**k-ups. I find the Tories conveniently bypass how Brexit is a huge carbuncle & failure. It’s not only having an adverse effect on Wales economy but also politically too. Gone is a 500 million market place replaced with one-sided nano- trade deals with the likes of Australia & New Zealand with deals that will no doubt decimate the Welsh farming industry with a flood of hormone injected lamb & beef produce.. Gone also… Read more »

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