On the day itself, our chairman Mike Denham told an audience at a joint TPA/IEA briefing “our major concern was that Hunt really did nothing about reducing the overall burden of taxation. We still have the highest level of taxation relative to GDP in 75 years.” That’s a problem, he said, because “we believe that we will not be able to generate robust, sustainable long-term growth unless we reduce that tax burden.”
“While we welcome tax cuts, we can see a pressing need to tackle the fundamental problem which is that the government is just spending too much. What I want to talk about is the burden of spending, which we call the ‘cost of government crisis’.”
Mike went on to discuss the “upward drift” of public spending over recent decades and chancellor Hunt’s “absolutely staggering” decisions to raise public spending in November and then again this month.
“In the 1990s, the average percentage… was 36 per cent of GDP taken up by public spending. In the noughties, the percentage went up to 40 per cent… Then we came to the 2010s. Now this was the age of austerity, people still talk about the age of austerity. Actually, the percentage of GDP taken up by public spending went up again to an average of 42 per cent. So there’s this continued upward drift, yes there are peaks and troughs, but it’s been pressing up. And this year, on Hunt’s current plans, we think that in the 2020s the average will end up at 45 per cent.”
This week, our research fellow Rory Meakin spoke to the all party parliamentary group on Taxation.
He said it was “as ever, a mixed bag”, with the mildly good measures announced in the budget being offset by the “grim” outlook for taxpayers, public finances and the economy as a result of previous decisions coming into effect this year.
Rory praised the simplifying and tax-cutting pension contributions measures but contrasted that with the extra complexity and enormous tax rises about to come into effect for corporation tax.
He noted that while the extension of full expensing for corporation tax by three years was welcome, analysis of the fiscal impact over the next few years flatters its beneficial impact on taxpayers. Full expensing is forecast to forego £8 billion in 2023-24 and £10.7 billion the following year. Meanwhile, the rate rise is forecast to raise £11.8 billion and £15.8 billion, respectively.
Those numbers substantially overplay how similar they are in scale. The forgone receipts are from investments that would be expensed at either 18 per cent a year or 6 per cent a year. The consequence of this is that for five or sixteen years to come the expensing that would have happened does not. The foregone revenues in 2025-26 already start to dip at £8.7 billion while in 2027-28 the OBR expect it to boost receipts by £2 billion. That's the end of the forecasting period but this positive effect would continue until all the 6 per cent allowances would have been written off.
It’s bad for the public finances in the short run (but good for taxpayers and investment). When the fiscal rules and the OBR’s forecasts are for five years, that's a political problem. It also explains not only why the measure is temporary but also why it lasts for three years instead of five. Making it last for three years means that the deficit numbers look better in the fifth year, helping to meet the chancellor’s deficit rule which says he needs to show debt as a share of GDP falling by the end of the forecast period. But a downside of that is that companies considering a project that might entail investment spending over five (or more years) can only now be sure that money spent in the first three years will be fully expensable. Only projects expected to be complete before 2027 are fully covered.
Rory mentioned, too, how Wine and Spirits Trade Association figures show that wine duty will go up by 20 per cent to 44p a bottle and sherry and port will go up by 44 per cent, by 97p and £1.30 respectively.
Table 1: combined income tax and national insurance liabilities for an average earner
| 2022-23 | 2023-24 | 2024-25 | 2025-26 | 2026-27 | 2027-28 | |
| Income (£) | 32,874 | 34,225 | 34,793 | 35,372 | 36,101 | 36,995 |
| Personal allowance (£) | 12,570 | 12,570 | 12,570 | 12,570 | 12,570 | 12,570 |
| Tax liability (£) | 6,497 | 6,929 | 6,889 | 7,069 | 7,295 | 7,572 |
| Tax liability (%) | 19.8 | 20.2 | 19.8 | 20.0 | 20.2 | 20.5 |
Table 2: combined income tax and national insurance liabilities for a minimum wage earner
| 2022-23 | 2023-24 | 2024-25 | 2025-26 | 2026-27 | 2027-28 | |
| Income (£) | 18,576 | 19,339 | 19,661 | 19,988 | 20,399 | 20,905 |
| Personal allowance (£) | 12,570 | 12,570 | 12,570 | 12,570 | 12,570 | 12,570 |
| Tax liability (£) | 1,922 | 2,166 | 2,198 | 2,300 | 2,427 | 2,584 |
| Tax liability (%) | 10.3 | 11.2 | 11.2 | 11.5 | 11.9 | 12.4 |
Meanwhile, the freeze in income tax and national insurance thresholds mean that an average earner’s tax bill will rise by £1,074 from £6,497 to £7,572 (or 19.8 per cent of gross income to 20.5 per cent, assuming the basic rate is cut to 19 per cent). And a minimum wage earner’s tax will rise by £662 from £1,922 to £2,584 (or 10.3 per cent to 12.4 per cent).
He noted that in 2019, we calculated that Jeremy Corbyn’s plans would have raised the tax burden to an average of 37.3 per cent of GDP over this parliament, ending at 37.9 per cent in 2024-25. The government’s plans are in that ballpark. The chancellor plans to raise the tax burden to 37.3 per cent in 2024-25 and 37.7 per cent two years later. As Rory said: “grim”.