Rishi Sunak is imposing the biggest tax rise the UK has seen since the 1970s. The Government’s decision to freeze personal tax thresholds for the next five years will drag millions of middle-income earners into the 40pc tax bracket.
In the early 1990s, just 3.5pc of UK adults paid income tax at the higher rate – a tax-band designed for the seriously well-paid. Over the next 20 years or so, tax thresholds were generally increased in line with inflation, but not as fast as earnings, so the number of workers paying 40pc steadily rose.
From 2011 to 2015, the coalition government cut the higher-rate threshold each year – pushing the share of higher-rate taxpayers to 11pc today.
But now Sunak and his Chancellor, Jeremy Hunt, have locked the starting and higher-rate thresholds at £12,570 and £50,270 respectively until 2028. As such, the share of adults paying tax at 40pc will soar to 14pc over the next five years, according to an Institute of Fiscal Studies report released last week.
That amounts to 7.8m adults – 20pc of the 38m projected to be paying income tax in five years’ time. So no less than a fifth of the workforce will be higher-rate taxpayers.
Back in 1993, almost no nurses paid the higher rate. By 2028, 13pc of those working on NHS wards – over one in eight – will pay tax at 40pc. Just 4pc of construction workers were in the upper tax bracket in the early 1990s – a share set to rise to 11pc.
And over a quarter of teachers are now on course to pay tax at 40pc in five years, compared to one in 20 a generation ago.
The nurses, builders and teachers – along with the police officers, clerical workers and electricians – soon to be dragged into the upper tax bracket are by no means wealthy. Why should they strive for a promotion, or do overtime, when the state grabs 40pc of everything extra they earn – over half, in fact, including National Insurance contributions?
This Tory government has imposed the ultimate stealth tax – a huge disincentive to work, just when the economy desperately needs to get moving.
The Office for Budget Responsibility calculates this extended threshold freeze will raise £26bn a year – equivalent to hiking the basic rate of income tax from 20p to 24p in the pound, a move that would spark a huge political backlash.
Yet by nailing-down thresholds, Sunak and Hunt are loading the exact same additional tax burden onto hard-working, middle-income employees in a manner that has barely hit the headlines.
The IFS rightly describes this threshold lock as a “very large tax increase”, a “seismic” change to the tax system. And the reason it’s happening is because government spending is spiralling – with public spending estimated at £1,189bn in 2023/24.
That’s around £42,000 per household or 46.2p of GDP, a near-record high. And with our national debt now north of 100pc of GDP, the UK is entering dangerous waters if ministers borrow significantly more.
Throughout the 1990s, state spending averaged around 36.6pc of national income. During the decade from 2000, government expenditure rose to 39.8pc of GDP, in part due to heavy spending in 2009, in the aftermath of the global financial crisis. High spending levels were maintained during the 2010s, with state spending equivalent to 41.9pc of GDP.
Since then, though, everything has changed. Massive expenditure during Covid lockdown, funded largely by government bonds bought with money created by the Bank of England, saw government spending skyrocket to 53.1pc of national income in 2020 – as the state channelled a hydrant of cash into furlough schemes and business support loans.
As lockdown ended and the economy reopened, state spending then dropped sharply to 44.5pc of GDP in 2021. But rather than continuing to fall to pre-Covid levels, government expenditure then rose again to 46.1pc in 2022, and an estimated 46.2pc this year.
Apart from the 2020 lockdown, when the Government paid much of the workforce to stay at home, there have been only two other occasions since the Second World War when UK state spending has exceeded 46pc of GDP.
One was 1975 – when a Labour government spent to such excess, in an attempt to placate wildly militant trade unions, that the UK had to go “cap in hand” to the International Monetary Fund for a bail-out.
The other occasion was 2009 – when governments were forced to back a once-in-a-century bank rescue package, after the global economy endured the biggest financial shock since the 1929 Wall Street crash.
Yet here we are, with a Conservative Government spending more than 46pc of GDP, and expenditure projected still to be around 44pc of national income in five years’ time – even though several years have passed since lockdown and there is no immediate crisis.
That’s what is so scary – the UK’s steady state government spending is now at levels previously associated only with moments of true emergency. After years of quantitative easing and sky-high borrowing, the complacency toward the management of our national accounts is truly breathtaking.
Freezing tax thresholds until 2027, dragging a fifth of the workforce into the higher tax bracket, will seriously hinder economic growth. And few policies are more likely to discourage investment than hiking corporation tax from 19pc to 25pc – a move which, far from raising revenue, will likely cost the Treasury money.
Liz Truss and Kwasi Kwarteng were guilty of hubris – trying to do too much, too soon, without warning what was coming. But with wholesale energy prices peaking just ahead of last September’s mini-Budget, it was the cost of the Government’s energy price cap that roiled bond markets – along with the Bank of England decision, just days before Kwarteng’s statement, to start reversing years of QE by selling gilts into a market that was already pretty phased.
The central Truss-Kwarteng aim of reducing the UK’s growth-sapping, record-high tax burden remains exactly right. Such policies should be introduced more slowly and steadily, yes, reassuring investors and keeping financial markets onside.
But they still need to happen – if the UK is to escape this high-tax, low-growth trap before our fragile public finances face a fully-blown systemic crisis.
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