Britain’s poorest three million households will be as little as 63p a month better off under Liz Truss’s plans to cut national insurance contributions, while the richest will benefit by £150, according to economic analysis.
What a way to blow £30bn. – Owl
Matt Dathan www.thetimes.co.uk
Kwasi Kwarteng, the chancellor, is expected to make good on the prime minister’s pledge to scrap the increase in national insurance contributions in a mini budget on Friday.
Reversing the 1.25 per cent rise, which was only implemented in April, will be among a range of measures intended to stimulate economic growth and is expected to take effect as early as November.
Tom Waters, a senior research economist at the IFS, said people earning more than £100,000 would benefit the most, adding that there were more progressive ways to cut taxes, such as raising the threshold at which workers pay the basic rate of income tax. Kwarteng is said to be more persuaded towards cutting income tax by 1p rather than raising the threshold, which would still benefit the middle classes more than those on the minimum wage.
The move would bring forward plans announced by the government earlier this year to cut 1p off income tax from 2024, while Goldman Sachs, the US investment bank, said it is expecting Kwarteng to go further by cutting 2p from basic rate income tax.
A final decision has not been taken, it is understood, while a reduction in the basic rate could be deferred until a formal budget, expected in November.
The chancellor is also expected to create 12 special investment zones across the UK that could offer workers a significant discount in employer national insurance contributions for staff employed within the zones. He will use Friday’s “fiscal event” to freeze corporation tax, with the total package of tax cuts expected to cost between £30 billion and £50 billion.
The Times revealed on Saturday that Kwarteng is reviewing fiscal rules that require debt to fall as a proportion of national income in 2024-25 in order to make way for the massive tax cuts.
There is also expected to be a package of deregulation to stimulate a “big bang 2.0”, which could include removing the cap on bankers’ bonuses, slashing environmental protections that have historically made it hard to build on certain types of land, and scrapping plans to prevent supermarkets advertising buy one get one free-type multibuy deals on junk food as part of the government’s obesity strategy.
However, analysis of Truss’s existing plans to cut NICs by the Institute for Fiscal Studies has revealed the extent to which the move will disproportionately benefit richer households compared to the poorest.
The richest tenth of households, who earn an average of £108,000, will save £1,800 on their annual tax bill, equivalent to £150 per month. In contrast, the poorest ten per cent of households, who on average earn £12,000, will save just £7.66 on their annual tax bill, which works out at just 63p per month or 14p per week.
Those in households with the average UK household income of £31,400 will save about £250 per year, or £20 per month. Households with an income of £55,000 will save about £700 per year, which is £58 per month, while households on £23,000 will benefit by about £73 per month, according to the IFS analysis.
Tom Waters, senior research economist at the IFS, said that while tax cuts would always benefit richer households over the poorest, there were fairer ways in which Truss could cut taxes.
He said: “Reversing the recent NICs rise would tend to benefit richer households more than poorer ones, even as a share of their income; the richest 10th, for example, would gain about £1,800 per year, or 1.7 per cent of their income, and the poorest tenth about £7 per year, less than 0.1 per cent of their income.
“That’s partly just a natural consequence of the existing tax system: those towards the bottom of the income distribution don’t pay much in direct taxes, and so it’s hard to cut taxes in a way that makes a big difference to them.
“That said, there are more progressive ways to cut tax — raising the income tax personal allowance, for example, which is currently due to be frozen in cash terms until March 2025. Tax cuts along these lines, including a NICs cut, would of course strengthen incentives for people to move into work.”
Tony Wilson, director of the Institute for Employment Studies, said the plans were a “tax giveaway to relatively high earners” and warned that they risked higher inflation. He said: “The worry that the Bank of England and Treasury officials will be that the move is more inflationary than a more targeted subsidy or tax cut at those on lower incomes. “Another £600 in the pocket of higher earners is likely to lead to more discretionary spending.
Wilson urged the Treasury to spend billions of pounds that was set aside but unused during the pandemic to stave off long-term unemployment, which never transpired, in order to attract tens of thousands of over-50s back into employment. Many over-50s left the labour market during or after the pandemic but are not counted as unemployed because they are not actively seeking work.
The Treasury only spent about £1.3 billion of the £2 billion set aside for the Kickstart programme, and the £1.3 billion it saved from the projected £2.7 billion it committed to the Restart programme – both designed to get people back into work.
He said: “There are other things we can do on policy to make our labour market work better and if we don’t get more people in the labour market, other decisions, such as tax cuts, will be counter-productive.
“One thing the government could do is reinvest the £10 billion set aside during the pandemic to stave off long-term unemployment that never transpired.”
No10 and the Treasury have said Friday’s “fiscal event” will be focussed on how to create economic growth. Kwarteng is “prepared to be bold” and “prepared to have the argument,” sources said, adding that the UK can “no longer carry on fighting over what’s left of the pie, which hasn’t been growing at all over the last few years”.
Their ambition is to “grow the pie for the prosperity of the country”. The mini budget is designed to deliver Truss’s pledges during the Conservative leadership election over the summer, with a full, formal budget planned for November, which will be accompanied by the usual forecasts by the Office for Budget Responsibility, the spending watchdog.