Pre-election giveaways arrive early with biggest tax cuts since 1988, but taxes are up not down – rising by £4,300 per household

The Chancellor has spent almost all of the near £90 billion of fiscal good news handed to him by the Office for Budget Responsibility (OBR), mainly on tax cuts well-targeted at investment and earnings. But these were funded by handing whoever wins the next election implausible plans to cut public spending, the Resolution Foundation said today (Wednesday) in response to Autumn Statement 2023.

The Chancellor received a weak economic outlook from the OBR – including falling household disposable incomes (-0.9 per cent in 2024) during an election year. However, surging tax revenues, partly reflecting higher inflation, have delivered a pre-measures improvement in public finances of £88.5 billion between 2023-24 and 2027-28.

The Chancellor has used this improvement to go early on pre-election giveaways, with tax cuts worth £20 billion in 2028-29. This is the biggest tax reduction package since 1988 (Liz Truss’s announced but never implemented ones aside).

The 2p cut to the main rate of employee National Insurance (NI), along with the 1p cut for self-employed workers and the abolition of Class 2 NI, will give 29 million workers an average gain of £330 next year, as well as a welcome reduction in the tax incentive for higher earners to be self-employed.

However, these £10 billion of personal tax cuts are still dwarfed by the £45 billion of already announced national insurance and income tax rises. As a result, households will on average be £1,200 worse off overall thanks to the changes announced in this parliament. Only those earning around £11,000 to £13,000, and £42,000 to £52,000, will be better off.

The Chancellor also made ‘full expensing’ for business investment permanent, a welcome move that the OBR thinks will raise GDP in the long term by 0.2 per cent, but could be much higher.

The overall picture is of rising taxes in the 2020s, even with the £20 billion of total tax cuts announced today. Tax as a share of GDP is still set to rise by 4.5 percentage points (or £4,300 per household) between 2019-20 and 2028-29 – the highest level in 80 years.

The Chancellor also announced a series of benefit changes that will boost the incomes of renters ahead of the next election, while cutting those of people with mobility challenges or moderate mental ill health after it. Raising Local Housing Allowances back in line with rents in April 2024 is welcome and will boost the incomes of up to 1.6 million households next year, while tightening the criteria for the Work Capability Assessment from 2025 will see 371,000 people lose an average of £3,400 a year by 2028-29.

The improved public finance forecasts that made significant tax cuts possible reflect the fiscal fiction that the Chancellor can bank the extra tax revenue from higher inflation, but make no adjustment to public spending plans in light of higher prices.

Higher inflation has knocked £19 billion off total departmental spending by 2027-28 compared to March plans, with unprotected departments (including prisons and local government) facing cuts of almost 9 per cent in their day-to-day spending between 2024-25 and 2028-29.

Capital spending is also set to fall by over a third as a share of GDP between 2023-24 and 2028-29 – a cut equivalent to £20 billion – seriously undermining future growth prospects.

The scale of these cuts is implausibly large, says the Foundation, but the Chancellor is relying on them to fund his pre-election tax cuts and maintain fiscal headroom of £13 billion against his debt rule. This headroom remains far too low, half the average level of headroom since 2010 of £27 billion.

Torsten Bell, Chief Executive at the Resolution Foundation, said:

“Today the Chancellor used an inflation-driven surge in tax receipts to go early on pre-election giveaways – announcing the biggest package of tax cuts since 1988. In doing so, the Chancellor has rightly prioritised workers’ earnings and firms’ investment plans. Raising the Local Housing Allowance will also help 1.6 million households struggling with surging rents.

“But the truth is taxes are up not down. Today’s cuts are dwarfed by tax rises already underway. By the end of this decade taxes are set to be up by the equivalent of £4,300 per household compared to 2019.

“Worse, the giveaways announced today are funded by handing whoever wins the next election implausibly large spending cuts. Tax cuts to boost business investment are welcome, but undermined by plans to cut public investment by over a third – it’s hard to think of a more anti-growth policy.”