Cash-strapped Britain cuts taxes for workers as election looms

By Hanna Ziady, CNN

London (CNN) — UK finance minister Jeremy Hunt announced a tax cut for workers Wednesday as he unveiled what is likely to be the government’s last budget before a general election later this year.

Hunt cut national insurance — a levy paid by people who work — by two percentage points. That means an additional £450 ($572) a year for the average employee or £350 for someone who is self-employed. It’s the second such cut in a matter of months.

“If we want to encourage hard work, we should let people keep as much of their own money as possible,” Hunt said.

But soaring UK government debt, crumbling public services and a lackluster economy left the chancellor with very little room for further substantial giveaways.

The economy barely grew in 2023, slipping into recession at the end of the year in stark contrast with Prime Minister Rishi Sunak’s pledge to generate growth. In 2024, the Bank of England sees output expanding just 0.25%, while the International Monetary Fund has forecast growth of 0.6%.

Hunt’s Conservative Party is trailing the opposition Labour Party with a wide margin in opinion polls, which had put him under enormous pressure to unveil tax cuts — however small — in a last-ditch bid to win voters.

But modest reductions to payroll taxes won’t change the fact that Britain’s overall tax burden, including taxes on companies, will rise to a post-war high in the coming years.

Living standards, meanwhile, have fallen. Economic output per person is still lower than it was at the end of 2019, having failed to fully recover from a sharp drop during the pandemic, according to the Office for National Statistics.

“Taxes are still rising, prices are still going up in the shops and mortgages are higher,” Rachel Reeves, the opposition Labour Party’s finance spokesperson, posted on X Wednesday.

“Nothing Jeremy Hunt has said today changes that. It’s time for change. It’s time for an election.”

Spending cuts ahead

The cut to national insurance, which will cost about £10.5 billion ($13.4 billion) a year, will be partly offset by rises in other taxes, including on wealthy foreigners resident in the United Kingdom, vaping products, business class flights and certain property purchases.

A windfall tax on oil and gas companies, which have enjoyed record earnings thanks to high energy prices boosted by Russia’s war in Ukraine, will also be extended by another year to March 2029.

Wednesday’s measures do very little to reduce UK government debt, which has surged by more than 40% since 2020, as the state spent big to cushion households and businesses from the impact of Covid-19 lockdowns and soaring energy costs.

At the end of January, public sector debt surpassed £2.6 trillion ($3.3 trillion), according to the ONS, a level not seen since the early 1960s and almost the same size as the nation’s annual gross domestic product. Elevated interest rates are piling on the pain.

The cost of servicing that growing debt pile is siphoning ever greater amounts of money away from vital public services, which have already been squeezed by inflation and past budget cuts.

Several local authorities have recently declared themselves bankrupt — including Britain’s second-biggest city, Birmingham, which on Tuesday approved plans to slash local services and dim street lights as it tries to balance the books. The Local Government Association warned in December that councils in England face a £4 billion ($5.1 billion) funding gap this year and next.

Other so-called “unprotected” areas of the national budget, such as social care, housing and the police force, are also at risk. Spending on defense, schools, the National Health Service and overseas aid has been ringfenced for now.

The government’s latest spending plans imply “unrealistic” falls in funding for unprotected departments “in the absence of sustained productivity growth,” said Yael Selfin, chief economist at KPMG UK.

“The majority of recent tax cuts may need to be reversed in the next parliament in order to maintain an adequate provision of public services,” she added.

The Office for Budget Responsibility, the government’s fiscal watchdog, similarly noted that the government’s budget plans imply considerable cuts to unprotected departments’ budgets.

Such cuts seem “unlikely when public services are creaking,” economists at Capital Economics wrote in a note last month.

And slashing future spending on public services to pay for tax cuts now could backfire. In a survey last month of nearly 2,000 British adults by Deltapoll and the Tony Blair Institute, 52% said the government should invest any extra money it has to improve the quality and efficiency of public services. Only 11% thought the money should be used to cut taxes.

This article has been updated with additional information.

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