Why Jeremy Hunt’s budget fails Britain

The evidence of past policy failures is all around us. Since 2010, the real economy has grown by around 1.2% a year and is set to have the weakest growth amongst G7 countries.

Jeremy Hunt

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

Every year, the UK parliament enacts a pantomime with deadly consequences. A man with a red box (might as well be a red nose) and known as the Chancellor, ritually promises to eradicate poverty, redistribute income and wealth, rejuvenate the economy and public services, and increase people’s prosperity and happiness. Instead for the last 14 years he has delivered, lower living standards, worse public services, crumbling infrastructure and transferred wealth from the masses to the rich. This year’s budget statement is no different.

Calamitous Policies

The evidence of past policy failures is all around us. Since 2010, the real economy has grown by around 1.2% a year and is set to have the weakest growth amongst G7 countries. The real average wage is unchanged since 2007 and Britons have faced the biggest fall in livings standards since the records began. The richest 1% of the population has more wealth than 70% of the population combined whilst 14.4m live in poverty. UNICEF reported that child poverty levels in the UK have risen by 20% in recent years, and the UK is ranked 39th out of 39 relatively well-off countries.

Deprived of good food, housing and healthcare, British children are up to 7cm shorter than their European counterparts. Malnutrition, scurvy and rickets have returned. A major reason for huge social disparities is that income from wealth, such as capital gains, is taxed at the rates of 10%-28% whilst wages are taxed at the rates of 20%-45%. In addition, national insurance contribution (NIC) at the rate of 10% is payable on wages between £12,570 and £50,270, and 2% above that. Recipients of capital gains, dividends and other forms of investment income do not pay any NIC.

Dwindling household incomes have led to lower investment in productive assets. The overall investment rate in the UK fell from a high of around 23% of GDP in the late 1980s to around 17% from 2000 onwards, compared to an average of 22% for the EU. Public investment in new industries has fallen from an average of 4.5% of GDP between 1949 and 1978 to 1.5% between 1979 and 2019. Public buildings are literally crumbling, there is a huge teacher shortage, local councils are going bankrupt and are cutting services, and 7.1m adults in England have very poor literacy skills. Roads are full of potholes. Hospitals in England have a waiting list of 7.6m appointments and 300,000 a year die whilst waiting for that appointment. 2.8m are chronically ill and unable work. People struggle to see a family doctor or find a dentist. This has a negative effect on productivity.

Disappointing Budget

Against the above background, the budget statement is disappointing. The erosion of disposable incomes continues. In March 2021, the government froze tax free personal allowance at £12,570 and income tax thresholds with the result that 40% marginal rate kicks in at £50270 and 45% marginal rate at  £125,140. One consequence is that in an inflationary environment is that 4.2m more workers now pay income tax. If nothing changes by 2028-29 another 3.7m workers will be forced to pay income tax at basic rate of 20%, another 2.7m at 40% and another 200,000 at 45%. Due to frozen tax thresholds, the government will collect another £41.1bn a year.

The Chancellor has handed a few crumbs to the masses in the shape of a 2p cut in the headline rate of national insurance, reducing it from 10% to 8%. It will cost around £10.2bn a year. Someone on median wage of around £29,600 will take home extra £341 year, easily wiped out by higher council tax, energy and household bills and higher income tax due to frozen thresholds. People earning £19,000 a year will be worse off as tax rises due to frozen thresholds will exceed cut in national insurance. Some 17.8m adults with annual income less than £12,570 will receive no benefit.

Due to fiscal drag pensioners will be forced to pay income tax on low incomes, as well as higher council tax, food and energy bills. The projected hit on pensioners is around £8bn. Real value of benefits is not protected so millions of workers relying upon universal credit to top-up their low wages will face real cuts.

The middle and higher income families, most likely to vote Conservative, are the major gainers. The higher rate of capital gains tax on residential property disposals has been cut from 28% to 24%. Owners of multiple properties will be the main beneficiaries of the tax break worth around £600m.

The high-income child benefit threshold will be increased from £50,000 to £60,000 with a taper extended to £80,000. Nearly 500,000 families with children would benefit by around £1,300 next year. In sharp contrast the two-child benefit cap which hits the poorest, depriving 402,000 families of around £3,200 a year is to be retained.

The International Monetary Fund (IMF) has urged the government to shun tax cuts called for greater investment in public services and infrastructure but that is not what the government has done. Green investment is missing altogether from the budget. The Chancellor has promised £3.5bn to replace the NHS IT system and claims that this will somehow generate savings of £35bn. Another £2.5bn top-up will largely meet the pay settlements. There is little or nothing extra for expansion of the NHS or appointment of additional doctors and nurses to reduce the 7.76m hospital appointment queue in England.

Tax cuts for higher income earners are financed by borrowing and cuts in public spending of around £19bn and will hammer councils, police, courts, justice, border checks and transport. Services will be cut and public sector workers face prospects of further real pay cuts. Potholes in roads will become a way of life.

The Chancellor soothed public anxieties by claiming that the UK is on track to become the world’s next Silicon Valley. However, he was silent on how this is to be achieved when there are severe skills shortages and due to low pay many academics are migrating to other countries. Last year, the government announced a package of $1.2bn (£1bn) investment into the vital semiconductor industry compared to $50bn by the US, $40bn by China and $10bn by India.

Instead of investment the government has launched a gimmick – a British ISA.  This nationalistic gesture will enable some to invest £5,000 a year in secondary UK stocks and shares for a tax free return. This will be beyond the reach of million as 34% of UK adults have savings of less than £1,000. Not a penny of the amounts put in the British ISA will go directly into investment in productive public or private assets though bankers and financial intermediaries will gain.

The budget is silent about value for money for the billions handed to private companies in subsidies. For example, Drax has received £6.2bn subsidy and set to receive another £4.2bn. Rail companies have received £75bn subsidy in the last decade and in return people don’t own a single railway engine or carriage.

On the face of it, the government is helping small traders raising the VAT registration threshold from annual turnover of £85,000 to £90,000. But nothing has been done to simplify rules. Here are some nightmare examples: toilet rolls have a VAT of 20% but caviar is zero-rated. Potato crisps have 20% VAT but prawn crackers and tortilla chips are zero-rated. Cakes and biscuits are zero-rated but if they are wholly or partly covered in chocolate then taxed at the standard rate of 20. There is 0% VAT on unshelled nuts but 20% VAT on shelled nuts with the exception of peanuts even when they are out of their shells. Roasted and salted nuts are subject to 20% VAT but toasted ones can be VAT free.

Overall, the budget hits pensioners and average families and transfers wealth from the less well-off to the rich. It is likely that the government will try to boost its dwindling electoral fortunes in autumn with a tax cut, but it has consistently failed to address deeper economic problems. The economy can’t be revived by cutting purchasing power of the masses and by strangling public investment.

The budget also poses major challenges for the Labour Party, the official opposition in parliament. It had promised not to increase capital gains tax, corporation tax or levy any wealth taxes. It pinned its hopes on somehow securing growth but that looks forlorn without major investment or rebalancing the tax system in favour of the masses. It had modest proposals for raising additional tax revenues by reforming non-dom taxation, levying 20% VAT on private school fees to raise around £1.7bn, and reforming the taxation of “carried interest” at private equity to raise around £600m a year. Now the government has pre-emptied the non-dom taxation reform which it claims will raise £2.7bn in 2026/27. This leaves Labour with £2.3bn of tax raising initiatives, nowhere enough to rebuild the economy or redistribute. It will need to revisit the entire issue of taxation, public spending and economic management.

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