By Duncan Simpson, chief economist at the TaxPayers’ Alliance
It’s been a crazy fortnight. It feels like a lifetime ago, but it was only the start of this month that the new government under Liz Truss announced a massive state intervention in the energy market. And now we may be on the verge of the biggest tax-cutting Budget in a long time. Is this what we can expect from a new era of ‘Trussonomics’?
Perhaps we should prepare for the worst. The previous announcement on energy measures, which boiled down to huge price controls, was extremely worrying. The war in Ukraine may have muddied the water, but the intervention was still staggering in scale, and likely to leave taxpayers on the hook for billions of pounds. Some have reported an estimated cost of up to £150 billion, dwarfing almost any government intervention ever. Granted there were some welcome moves on green levies, but not a promising start in the round.
But generally, expectations for the mini-budget tomorrow are running sky-high.
We know that Truss plans to roll back the corporation tax rises of her predecessors. And rightly so. At 19 per cent, the UK enjoyed the lowest headline rate of tax on corporate profits in the G7. Only Italy’s 24 per cent rate was lower than the 25 per cent rate Rishi Sunak had planned from 2023. However, headline rates are only part of the picture. Various allowances and exemptions apply which reduce the tax levied, and produce an effective marginal tax rate. Analysis showed the UK’s marginal effective rate moving to the highest among the G7 (the likes of Canada, Japan and the US) and BRIC (such as India and China) countries.
Rolling this back will be brilliant for growth. Once the measures are confirmed we’ll be running our dynamic tax model to gauge the impact, but early figures from the Centre for Policy Studies and the Tax Foundation suggest something like a 1.2 per cent growth boost.
Then there’s the all-but-certain cancellation of the national insurance rise too. This tax hike on working people should never have happened. It whacks wages and hits employers too. Unless it’s cancelled, we estimate it’ll cost the economy around £24 billion over ten years. In other words, two thirds of health and social care levy would be lost to slower growth. Scrapping the rise is a no-brainer - though we’re not sure why Truss supported it in the first place. Hey ho.
We also saw reports yesterday that the mini-budget may also include a cut in stamp duty. Once again, this is exactly the kind of thing we need to see if the government is planning to go for growth. Stamp duty functions like many other transaction taxes in that it impedes the effective allocation of capital, which in turn affects investment decisions. Our dynamic tax model revealed that stamp duty depresses growth, chokes off investment and even holds down wages. We estimated that were stamp duty abolished, by 2029 GDP would be £27 billion higher, investment up by £7 billion and average weekly earnings £6 greater.
Together, these are promising signs. Combined with the reports that Truss plans to bring forward the planned income tax cut (something we’ve campaigned for and once again brings bumper benefits for growth), this could be the most taxpayer-friendly fiscal event in recent times.
Is there anything else we’d like to see? Matt Lesh of the Institute of Economic Affairs rightly called it “an opportunity to reset the agenda” and lays out the kind of measures that might make this fiscal event a growth game-changer: scrapping the factory tax, abolishing the higher rate tax thresholds and launching a radical tax reform white paper.
Given the talk about inheritance tax following the death of the Queen and the very real concerns acknowledged by Liz Truss that social care costs will eat into people’s own inheritances, why not also look again at inheritance tax? It’s distortionary, unfair and very unpopular. So increasing the payment threshold to £1 million would be welcome indeed.
Yet to be mentioned though are measures to bring down spending. Tax cuts should turbo-charge growth, helping to close the yawning deficit and national debt. But without a serious programme of savings and efficiencies, the cost of government crisis will continue to bite long into the future. Governments cannot go on spending unsustainably forever. But perhaps that’s simply too much to ask of Trussonomics.