Don’t be fooled, Rishi Sunak is a fiscal conservative first, and a low-tax conservative second. This was a tax-cutting spring statement, but as the Office Budget Responsibility (OBR) pointed out, on balance Sunak has been a tax-hiking Chancellor.
In fact, the net cut to personal taxes introduced at the Spring Statement offsets “just over a quarter of the personal tax rises he announced last year.”
Since he became Chancellor Rishi Sunak has raised taxes fifteen times.
In many cases, the rises have happened by stealth. They may not have grabbed the headlines, but they are a big deal. In five years time, the OBR calculates that these largely unnoticed freezes to income tax thresholds will bring in as much as the Health and Social Care levy.
When Sunak froze the thresholds in 2020, I don’t think he expected inflation to hit 9 per cent in 2022. Wages are going up, but prices are going up by even more. So, for many people, 2022 will be a year where their spending power falls, but their tax burden increases because they are dragged into higher thresholds.
When Boris Johnson ran for leader in the halcyon days of 2019, all we had to worry about was the prospect of a No Deal Brexit. Then, Johnson floated a plan to hike the income tax threshold to £80,000 a year to counter decades of fiscal drag. As it stands, a much larger share of the population will pay the higher rate than either Boris or Rishi ever bargained for.
Not only is he hiking taxes by stealth, while announcing attention-grabbing, but relatively smaller, tax cuts. He has also timed his tax cuts for maximum electoral advantage.
As pointed out by Giles Wilkes, a former adviser to Theresa May, disposable income is set to fall in real terms by 1.5 per cent this year and 0.5 per cent next year, before surging by 2 per cent in 2024. He could smooth the pain out, but instead he’s gone for a feel-good election year.
But there’s another side to the Chancellor.
He clearly sees himself as a tax reformer in the Lawson mould. So far, his record is mixed. The reforms to alcohol duty last Autumn were sensible and rightly praised, but his decision to hike NI while cutting income tax is hard to justify on any basis other than crude politics. It will mean lower taxes for buy-to-let landlords and pensioners, but higher taxes on those in work.
He has signalled that the next budget will be a big one for tax reform. Floating reforms to the widely-criticised and bureaucratic Apprenticeship Levy and enhancing R&D tax credit. But top of the list is tackling under-investment. The Chancellor has rightly identified that by international standards our tax system’s treatment of investment in physical capital is stingy. He will need to act soon to fix that as next year the super-deduction will expire and corporation tax will rise to 25 per cent.
One of the ideas Sunak has floated is allowing businesses to deduct capital costs in full from their corporate tax bill upfront, just like any other expense. It’d have a significant upfront revenue cost, which may lead to more timid measures, but it would have the impact of making the UK one of the most investment friendly tax codes in the world. But corporation tax isn’t the only barrier to investment, he should look again at business rates too. I won’t be the first nor the last person to point out how ripe they are for reform.
As it stands, manufacturers who upgrade their factories are hit with higher tax bills. The Chancellor’s recent improvement relief, which grants a year’s relief for new improvements, is woefully inadequate for addressing this.
If we are going to be a high-tax economy, then we need to think hard about the way revenue is raised, and prioritise cuts to the taxes that damage growth the most.