With the general election at most 14 months away, the British government announced on Wednesday that it would cut taxes for millions of workers from early next year.
Jeremy Hunt, Britain’s top finance official, announced a series of measures aimed at tackling the country’s stagnant economy by boosting business investment and encouraging more people into the workforce. At the same time, his political party, the Conservatives, hopes the tax breaks will boost its electoral chances, as it is currently trailing the opposition Labor Party by 20 points in polls.
National Insurance, a tax paid by employers and employees to fund state pensions and some benefits, will be cut by 2 percentage points to 10 per cent for workers, Mr Hunt said. This tax is separate from other income taxes.
The government will also extend tax relief for business investment and cut taxes for the self-employed, Mr Hunt said. The measures would increase business investment by £20 billion a year, he said.
“Because of the difficult decisions we have made over the last year,” Mr. Hunt said in a speech to lawmakers in Parliament on Wednesday, inflation was slowing and government debt was lower than previously forecast. “I said we would cut taxes if we could, but only responsibly and only in a way that doesn’t fuel inflation,” he added. Today’s economic forecasts, he said, mean “I can deliver a package that does just that.”
In recent days, government officials, including Prime Minister Rishi Sunak, said the British economy had reached a turnaround that made tax cuts possible. Last week, data showed Britain’s inflation rate fell to 4.6 percent in October, and Mr Sunak declared a success on his promise to halve inflation this year.
But the country’s economic prospects remain weak. Although inflation hit its lowest level in two years, it was still more than double the Bank of England’s 2 percent target and higher than in the United States and Western Europe. The bank recently forecast that economic growth will remain stagnant through 2024 and 2025. At the same time, the country’s mountain of debt is already around 98 percent of gross domestic product, the highest level since the 1960s, and the costs of servicing that debt have risen significantly due to higher interest rates and rising prices.
In recent years, Britain’s public finances have been strained by the cost of its pandemic response measures and the £104 billion of support to households during the recent energy price shock. The government’s fiscal credibility has also been significantly damaged by the unfunded tax cuts during Liz Truss’ short time in office. When he was installed as chancellor a year ago, Mr Hunt was careful with the country’s money and abandoned almost all of Ms Truss’s plans. He said there was little scope for spending increases and tax cuts given the need to reduce debt and the government having to be careful not to stoke inflationary pressures.
Now, with the election in sight, Mr Hunt has found the money to offer some relief in the form of lower taxes and even a freeze on alcohol duty. He is capable of this due to government spending cuts planned for several years. Economists have warned that it would be difficult for the government to implement the already strained budget plans of ministries.
Stephen Castle contributed reporting.
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