Thursday, 23rd November 2023
Higher inflation has boosted tax revenues. Rather than compensate public services, or bank the spoils, the Chancellor decided to cut taxes.
Paul Johnson, Director of the IFS, said: “That was not the quiet Autumn Statement we were promised.”
Before assessing the specifics, it’s worth getting a few things straight. The public finances haven’t meaningfully improved. The growth outlook has weakened. Inflation is expected to stay higher for longer.
Higher inflation pushes up tax receipts by more than it pushes up spending on debt interest or social security benefits; but rather than use the proceeds to ease the ongoing ‘fiscal drag’ effects of threshold freezes, or to compensate public services for higher costs, the Chancellor opted to cut other taxes. His immediate cut to National Insurance will put more money into workers’ pockets when it comes in but won’t be enough to prevent this from being the biggest tax-raising parliament in modern times. These cuts will also not stop tax revenues rising to their highest ever levels. The “full expensing” cut to corporation tax is a welcome extension of the temporary cut announced in March and, alongside a slew of other reforms, does indicate that this was an event focused on medium term growth as well as a pre election giveaway.
Announcing immediate tax cuts in response to highly uncertain changes in assumptions about the UK’s medium-term economic prospects does not feel like a recipe for good management of the public finances, especially when some extra “space” is opened up by announcing another year of very low increases in public service spending, and cuts in investment spending, which may prove hard to deliver. Learn More /…