Big drop in government borrowing boosts Hunt’s tax cut plans
Britain’s chancellor is celebrating some sunnier-than-expected news on the economic front today, which offers a boost to his plans to cut taxes in the Spring budget. UK government borrowing was much lower than anticipated last month, falling to its lowest point in any December for four years.
According to new ONS figures, public sector net borrowing hit £7.8 billion during December 2023 – less than half the figure a year earlier and far lower than the £11.4 billion it was forecast to reach.
This steep drop is in part down to a fall in the rate of inflation – which in turn eventually reduces debt interest and borrowing costs. Inflation hit 4 per cent last month, compared to 10 per cent a year earlier.
In another sign that Britain’s public finances might be turning a corner, markets anticipate that borrowing costs will fall again soon amid hopes that the Bank of England will soon start to cut interest rates from their 15-year high of 5.25 per cent.
Before we get too carried away with this good news, a bit of wider context is needed. Despite the fall in net borrowing last month, public sector debt remains at levels not seen since the early 1960s. And the overall debt to GDP ratio is still rising – it stands at 97.7%.
Even so, today’s unexpected figures may give Hunt extra room to unveil some crowd-pleasing measures on 6 March. The chancellor was already expected to make cuts to national insurance or a 1p cut to income tax the budget centrepiece.
For a desperate Tory party miles behind in the polls, extra tax cuts could be a welcome addition since those announced in Hunt’s previous Autumn statement did little to ease the tax burden.
Back in November, Hunt announced a two per cent cut to National Insurance for 27 million working people and an £11 billion tax cut to drive business investment, which he labelled “the largest business tax cut in modern British history”.
Yet despite these measures, the projected tax burden is still rising – to a postwar high of 38 per cent of GDP.
Personal taxes continue to increase overall because Hunt’s cuts were dwarfed by the impact of the government’s ongoing, multi-year freeze on tax thresholds.
The primary reason for the freezing of thresholds is to raise taxes in a manner that is less obvious to the taxpayer since the actual rates do not change. This stealth tax comes in handy for a party elected on a platform to not raise taxes. It’s a method that generates plenty of revenue too: the IFS estimates that the effect of freezing income tax and NIC thresholds will have raised an additional £52 billion by 2027-28.
But this stealth tax has dragged millions into higher brackets of income tax. Not only that, the Intergenerational Foundation estimates that increasing the tax burden via such a method disproportionately hurts the young as well as low and middle-income workers. The young and the poor are hurt by fiscal drag because their income is almost exclusively earned through work, in comparison to older and wealthier generations for whom unearned income in the form of dividends, rents or capital gains is much more common. The young are disproportionately affected too since student loan repayment thresholds have also been frozen.
There is also a debate raging at Westminster on whether any headroom should be used for tax cuts or alternatively for more public spending.
As the government seeks to make inroads into Labour’s commanding poll lead, it will need to ensure that its next host of tax cuts make an impact. Tory strategists are said to be concerned that the much-anticipated tax cuts announced in Hunt’s Autumn statement – despite costing £9 billion – appear to have had very little cut-through with voters, who are furious about all manner of other subjects.
Write to us with your comments to be considered for publication at letters@reaction.life