It appears that the Autumn Statement will now feature at least one major personal tax cut – so why the shift in messaging, and which tax could be slashed?
A few weeks ago, Jeremy Hunt stated there would be “no shortcuts” and made it plain that his priority would be growth-enhancing business tax cuts.
Personal tax cuts had previously been judged “virtually impossible.”
A week later, the apprehension about such cuts was gone. And now the Prime Minister has proposed that it is time to lower taxes.
Last Wednesday’s decline in inflation was a clear turning point in Britain’s recent economic tale, according to Rishi Sunak.
During his tenure as chancellor and prime minister – for the most of the last four years – the UK and the rest of the world have been hammered by an unparalleled series of geopolitical crises, resulting in large spending and rolling inflationary shocks.
The pandemic caused an inflationary supply chain crisis, driving up prices, while the Russia-Ukraine conflict saw the world’s largest energy exporter invade one of the world’s largest food exporters.
At this same moment, the size of the British workforce was reduced. This was caused in part by the pandemic’s aftermath and, in some important areas, by more restrictive post-Brexit worker permits. It was a strong inflationary cocktail.
As a result, the government’s claim is that last week’s confirmation that inflation has more than halved since its high marks a watershed moment for inflation.
They claim that because the UK is on a path to normal inflation, there is minimal risk of a personal tax decrease adding to price pressures.
But the Prime Minister’s case goes further. He claims that the 4.6% inflation rate is also a tipping point in a succession of economic disasters that has been unfolding since 2020. It’s time to put four years of increased government spending, borrowing, and taxation behind us.
He is referring to Labour’s calls for a “new” post-pandemic world with more resilient local supply chains and more borrowing-financed public investment, particularly on green projects.
US President Joe Biden may be able to do so since the United States has the privilege of printing the world’s reserve currency and is immune to debt-related concerns.
Mr Sunak suggested that the UK, especially following last year’s mini-budget, is incapable of doing so.
The majority of the savings will be aimed at encouraging firms to invest. However, a tax cut that helps “make work pay” and so enhances the supply of workers, thereby alleviating a crucial restraint on growth, will also be implemented.
Others in Westminster argue that the loss of a Supreme Court case on a plan to deport some asylum seekers to Rwanda on the same day as the inflation figure may help explain the Prime Minister’s desire for a headline personal tax cut to appease his backbenchers.
The Prime Minister’s speech on Monday, in which he stated that the government was now empowered to lower taxes, was scheduled to be delivered last Wednesday, before the Supreme Court’s decision.
It is worthwhile to wait for what the independent Office for Budget Responsibility (OBR) says in its economic forecasts before making a turnaround case.
Moreover, the Bank of England anticipates quarterly growth for next year of 0.01%, -0.04%, 0.01%, and 0.02% this month, adding up to zero by 2024.