Key Takeaways
- The freezing of income tax thresholds announced in the budget will harm the living standards of taxpayers in the bottom half of the income scale.
- Over 1.7 million workers will be dragged into either paying tax for the first time or pushed into a higher band by the additional three-year freeze on income tax and national insurance thresholds.
- The Resolution Foundation suggests that increasing headline income tax rates would have been a more effective way to bring in extra revenues, affecting all households but generating more cash for the Treasury from the better off.
- The budget has been criticized for lacking economic vision and locking in a high-tax, high-debt steady state in a world of low productivity growth and higher interest rates.
Introduction to the Budget
The recent budget announcement has been met with criticism from two major thinktanks, the Resolution Foundation and the National Institute of Economic and Social Research. The freezing of income tax thresholds for a further three years to 2031 is expected to harm the living standards of taxpayers in the bottom half of the income scale. This move is predicted to affect over 1.7 million workers, who will be dragged into either paying tax for the first time or pushed into a higher band. The Chancellor, Rachel Reeves, has conceded that this will hit "working people" but denied that it constitutes breaking the Labour manifesto, claiming it will bring in £12.4bn by 2030-31.
Impact on Low-to-Middle Earners
The Resolution Foundation’s chief executive, Ruth Curtice, has argued that the Chancellor should have instead increased headline income tax rates to bring in extra revenues. This approach would have affected all households but generated more cash for the Treasury from the better off. Curtice noted that a 1p tax rise would have raised the same amount of money but been less costly than freezing thresholds for anyone with an income below £35,000. Furthermore, she pointed out that all but the top 10% of the income distribution are worse off because of opting for threshold freezes over rate rises. This decision has been criticized for costing millions of low-to-middle earners, who would have been better off with their tax rates rising than their thresholds being frozen.
Alternative Approaches
Last month, Reeves hinted that she might break Labour’s manifesto promise to not raise income tax, national insurance, or VAT by adopting a plan put forward by the Resolution Foundation for a 2p income tax rise offset by a 2p national insurance cut. This plan would have only left taxpayers on incomes above £50,000 worse off. However, she later U-turned and backed away from the income tax rise. The National Institute of Economic and Social Research has criticized the budget for "lacking economic vision" and argued that the extension of the income tax threshold freeze to 2030 will fall disproportionately on the bottom half of the income distribution.
Economic Implications
The budget has been reviewed by the National Institute of Economic and Social Research, which stated that the extension of the Treasury’s financial buffer from £10bn to £22bn has calmed financial markets but left the Chancellor with little room to boost economic growth. The thinktank argued that the budget "locks in a high-tax, high-debt steady state in a world of low productivity growth and higher interest rates." The Resolution Foundation also noted that the budget was "far from pain-free, with major tax rises and cuts to public services coming down the line." Despite the Chancellor’s claims that government departments would avoid a squeeze on spending, the thinktank argued that tighter spending in the last years of the government would almost match the cuts imposed by the former Conservative chancellor George Osborne after the 2010 election.
Conclusion and Criticism
The budget speech was overshadowed by the early release of forecasts by the Office for Budget Responsibility before the Chancellor’s set-piece in the House of Commons. The Resolution Foundation delivered a mixed assessment of the budget, stating that it was "a far more upbeat budget than many were expecting, with significant cost-of-living support and sensible, progressive measures that reduce some of the distortions in the tax system." However, the thinktank also noted that the budget implied £6.4bn of cuts to other departments like the Home Office, justice, and local government, which would be equivalent to 88% of the average annual cuts made during the austerity years. Overall, the budget has been criticized for its lack of economic vision and its potential to harm low-to-middle earners.
