Rishi Sunak Is A “Fiscal Illusionist” Who Will Hike Taxes To Highest Level Since The 1950s, Says IFS
(UK Parliament/Jessica Taylor)
A leading economic think talk has labelled Rishi Sunak a “fiscal illusionist” arguing he is raising taxes to levels not seen since the 1950s, despite claiming he is cutting them.
The Institute for Fiscal Studies (IFS) delivered a damning verdict on the Chancellor’s Spring Statement yesterday, saying he did not announce enough to “protect poorer households from a significant hit to their living standards” due to rising energy costs and inflationary pressure.
Their director Paul Johnson said “in the long run this year’s giveaway turns into a substantial takeaway” after the Office for Budget Responsibility forecast that living standards would see “their largest financial year fall on record”.
Delivering his analysis on yesterday’s mini-Budget he said on the public finances Sunak “has proved to be something of a fiscal illusionist”, adding: “He told us that he cut taxes yesterday. In a sense he did. He increased the floor for National Insurance contributions and promised a cut in income tax in 2024.
“So Sunak’s statement contained big new tax cuts. But it also allowed taxes to rise. He can now expect to raise more in tax as a share of national income by 2025 than he expected last October.”
Johnson added: “In fact, taxes are set to rise to their highest level as a fraction of national income since Clement Attlee was prime minister.”
Explaining how a process called “fiscal drag” means that the Treasury’s tax revenues won’t actually decrease despite Sunak’s planned income tax cut in 2024-25, the IFS director was also critical of the Chancellor’s decision not to give departments extra cash to deal with higher inflation, now predicted to reach as much as 10% this year.
“He is also effectively cutting spending on public services in real terms relative to previous plans,” Johnson said.
“The exact scale of this cut relative to previous plans is a little uncertain, but it is significant.
“It will almost certainly mean some more hefty real pay cuts across the public sector, coming on top of cuts both in real terms and relative to the private sector over the last 12 years.”
He added to the voices critical of the decision to increase the rate of NI and cut the rate of income tax, saying it was “hard to think of any good reason” to do so, arguing it “again benefits those living off pensions and unearned incomes at the expense of workers” and calling it “a regressive policy combination”.
The economist, who used to work in the Treasury, conceded that Sunak “has been caught in a bind” due to the impact of the global pandemic, exacerbated by the Russian invasion of Ukraine.
Johnson commended the Chancellor for policies that “will take significantly more from those on the highest incomes”, but said: “However, he has not taken the opportunity to protect the poorest more fully simply by uprating their benefits more closely in line with actual inflation.
“His choice to increase NI rates and reduce the basic rate of income tax looks indefensible from an economic point of view, though one can see the political attractions.”
Johnson's comments came shortly after the Resolution Foundation released analysis showing 1.3 million Brits are set to fall into poverty next year, as the average household faces a £1,000 hit to their finances.
Their research director James Smith said this is “set to be the worst parliament on record” in terms of living standards.
“Unfortunately, the sort of depressing additional context here is a large rise in the offing in terms of poverty,” he continued.
“You generally expect absolute poverty to fall continuously over time. That would be a normal state of affairs.
“But we're now looking at a rise of about 1.3 million people in terms of poverty, and around half a million children. So, a depressing implication of the lack of support at the bottom.”
The think tank also dismissed Sunak’s recent suggestions that he was a low tax chancellor, pointing out that seven in eight workers will pay more tax and National Insurance from 2024.
“[Sunak] can’t yet claim to be a tax cutter. We’ve got 27 million out of 31 million workers ending up paying more tax on this basis,” Smith said.
“Despite some giveaways yesterday still tax rises are the key feature here.”
He continued: “He prioritised tax cutting, but we still have more people — the vast majority — paying more tax.
“We see not enough support, particularly for those on low income[s]. So, [Sunak] really came up short on both of those key tasks.
“There's plenty more to come, I think, in terms of talking about these issues and the Chancellor kept his powder dry for changes ahead of the upcoming election."
The Resolution Foundation found that only those earning between £11,000 and £13,500 will pay less tax and National Insurance under Sunak’s latest tax pledges, and only earners on between £49,100 and £50,300 will pay less income tax when it is cut from 2024.
“Tax’s overall share of the economy is historically high and has been rising, and the increase in the tax to GDP share equates to around £3,000 per household,” Smith said.
The think tank did state in its analysis, however, that public finances were in a “better shape” than household finances thanks to higher tax receipts seen during the pandemic recovery.
This gave Sunak a lot more “wiggle room” in yesterday’s statement, Smith claimed, but he still faced a lot of economic uncertainty over the ongoing crisis in Ukraine.
PoliticsHome provides the most comprehensive coverage of UK politics anywhere on the web, offering high quality original reporting and analysis: Subscribe