A tax-cutting Budget leaving more to do
- Oops!Something went wrong.Please try again later.
The battle lines are drawn. The next election, whenever it is, will once again be fought on the familiar territory of tax and spending.
In reducing National Insurance Contributions (NIC) in his Budget by another 2 per cent, Jeremy Hunt has delivered a tax cut worth more than £900 to the average employee in the space of just a few months. That is the most dramatic reduction since Nigel Lawson in 1988 moved the top rate from 60p in the pound to 40p. Mr Hunt said it was the lowest effective average earner tax rate since 1975.
Both Mr Hunt and Rishi Sunak hope that this time they are given credit by voters for their largesse. The last NIC cut took effect in January and yet had no obvious political effect. The opinion polls have been unremittingly awful for the Government ever since.
This was an unashamedly political Budget, replete with reminders that “Labour always puts up taxes.” In a free society, money does not belong to the government, Mr Hunt said. Low tax economies have more dynamism and innovation: we could not agree more and have been saying so for years while watching the tax burden rise to a record level.
This presents a quandary for Sir Keir, who to avoid accusations of profligacy, has accepted Government spending plans even though they will mean deep cuts across Whitehall and to local authorities. Labour will also support the tax cuts while seeing some of its favourite revenue raising measures snaffled, such as the abolition of non-dom status for foreigners, raising £2.7 billion a year, and a further £1.5 billion raid on North Sea oil and gas profits.
Tory MPs – especially those in Scotland – will find it hard to justify these U-turns, but it is an election year and they are aimed at potential Labour voters. Mr Hunt said the difference is that Labour would use the money to spend more while Tories cut taxes.
The rowdy barracking of the Chancellor by Labour MPs was a sign of the party’s evident nervousness despite their poll lead, especially when Mr Hunt announced the abolition of stamp duty relief on multiple dwellings.
The removal of the child benefit cliff edge at £50,000 will be popular, though it has been replaced with a taper starting at £60,000 and thus many of the same problems remain. Reducing capital gains tax for residential property from 28 per cent to 24 per cent is a good move and a tax cut that even the Treasury concedes will increase revenue.
Mr Hunt justified loading the tax cut on NICs as a way of creating a “simpler, fairer tax system that makes work pay”. It is rumoured that the Tories will pledge in the manifesto to abolish employee NICs over the lifetime of the next parliament. That would abandon the myth that NICs are savings for spending on pensions and welfare, but is fraught with difficulty. It would completely remove even a semblance of the contributory principle from social and welfare payments, which were not even addressed.
The big difference between NICs and income tax is that pensions are subject to income tax but not to NICS. Any merging of the two rather than outright abolition would amount to a tax rise for pensioners.
In addition to the tax cuts, the centrepiece of the Budget was extra funding and digital reform of the NHS to supply new IT systems at a cost of some £6 billion. Mr Hunt, a former Health Secretary, said this would unlock £35 billion in productivity savings.
Really? The history of IT systems is calamitous. Ten years ago, a patient record system wasted £10 billion before being abandoned. Even as Mr Hunt said the answer to the NHS’s difficulties was not to throw more money at it, he proceeded to do just that. The issue with the NHS is that it is a nationalised industry and therefore has none of the productivity incentives seen in the private sector. Until that changes the drain on public money will never end and outputs will not improve.
Other public service improvements will also rely on IT system expansion. Given the fiasco of the Horizon scandal in the Post Office this is not designed to generate a great deal of confidence.
The latest Ipsos survey put the Conservatives on 20 per cent support – 27 points behind Labour – which would decimate the parliamentary party if replicated at a general election. The Budget is intended to be the moment when the tide turns and the signs are promising.
Inflation continues to fall and is projected to be below 2 per cent within months. Interest rates are likely to be cut later this year and the current mild recession should be replaced with modest growth by the autumn, which must still be the favourite date for an election.
Some Tories are pushing for a poll in May if the Budget produces a bounce in the polls, but Mr Sunak will surely want to see the impact of the latest measures filter through before going to the country. There is much still to play for.
In the latest poll, 45 per cent of voters said they were undecided who to support, suggesting almost half the electorate has not warmed to Sir Keir Starmer’s Labour opposition as an alternative government. We will discover in the coming days and weeks whether Mr Hunt’s Budget has won them over.
