A senior official previously charged with vetting the Treasury’s plans has told the BBC chancellor Rishi Sunak can afford to postpone April’s tax rises.
Sir Charlie Bean, who recently left the Office for Budget Responsibility, said the plan for an immediate rise may be political rather than economic.
April’s National Insurance rise will tax the average worker £250 a year, and raise costs for firms which hire staff.
The chancellor maintains the priority has to be shrinking the deficit.
Mr Sunak said that requires “hard work, prioritisation, and the willingness to make difficult and often unpopular arguments elsewhere.”
But Sir Charlie said: “There is no problem in the UK borrowing several billion pounds for one extra year. What you can’t run is sustained large deficits, but the pace at which you close a deficit is basically a political judgement,”
The hikes breaks a manifesto pledge and spells the highest tax burden since the 1950s. Critics include those in Rishi Sunak’s own party: MP Sir John Redwood fears the hikes could “sandbag” the recovery.
He is among those who’ve highlighted that the deficit has been closing faster than expected recently anyway, thanks to a stronger jobs recovery.
‘Payment with a purpose’
Mr Sunak had envisaged this being payback time – after a rescue plan that shielded most livelihoods from the ravages of the pandemic caused the biggest deficit in peacetime.
He wants to restore the public purse and tackle long-standing issues. He framed the hikes, announced last autumn, as payment with a purpose, stating “every pound from the Levy will go directly to health and social care.”
But Mr Sunak hadn’t foreseen the extent of the cost of living crisis. As the war in Ukraine elevates fuel prices, inflation may hit a 40-year high.
Households could see a reduction to living standards equivalent to £1,000 a year, according to some analysis.
And that’s without April’s tax rises.
But the chancellor has stood firm – so far.
Raise taxes now, he argues, and he can deliver sustainably lower taxes in coming years – and avoid escalating interest payments on government debt.
Options available
Even so, can he actually deliver those future cuts?
Economists say a tried-and-tested sweetener, a cut to the main rate of income tax, could be affordable ahead of the election. But he may have to raise cash elsewhere.
With levelling up and net zero on the agenda, many note that government may be taking a more relaxed view on the size of the state, a more interventionist role. And the public purse isn’t immune to inflation: money earmarked for services won’t stretch as far as expected.
Meanwhile, longer term, Sir Charlie says demographics could thwart intentions.
“It’s not just people living longer but also technological advances in the way the health sector and the demand is such that if those treatments are available to keep people alive longer, then people will want them.
“And it’s reasonable to think that the rising trend in health and social care spending and pensions will be adding something like another £75 billion spending over the next five years, £150 billion, potentially over the next decade.”
Can that be offset by squeezing spending elsewhere?
Lord Macpherson, permanent secretary at the Treasury until 2016, is sceptical.
“A lot of the low hanging fruit in the public sector was effectively plucked by [former chancellor] George Osborne” he says. “So the scope for cutting programmes like the police, the prisons, local authorities simply isn’t there”.
In the post-war years, governments also managed to ramp up health spending without the tax burden soaring by cutting back on areas such as defence spending – but the war in Ukraine is putting renewed pressures on that area.
Pensions problem
Could welfare spending provide an answer?
Until this year, the state pension was earmarked to rise by the lesser of inflation, average wages growth or 2.5%. That triple lock has been suspended temporarily, breaking another manifesto pledge, after distortions to the economy caused by Covid made it prohibitively expensive.
Economist Dame DeAnne Julius, previously on the Bank of England’s Monetary Policy Committee queries if it can be reinstated.
“Over the last 10 years since it’s been in place, pensions have grown much faster than either earnings or inflation. So that is a ratchet that we really can’t afford.”
Even so, taxes may have to raise more cash. But from whom? Tapping the richest might appeal but DeAnne Julius highlights that “the highest 10% of earners actually pay 60% of income tax revenue.” She prefers carbon taxes.
Lord Macpherson says only the big three: income tax, national insurance or VAT can raise serious money.
But George Osborne’s difficulties with the so-called Pasty Tax show how hard raising one of those can be.
There are no easy answers.
Chancellors pray for faster growth that automatically replenishes the coffers. But often they’ve been disappointed – or faced major curveballs.
The messages from the Health and Social Care Levy was: if you want more services, you have to pay up. That will likely be echoed in more difficult conversations with voters
As the clock ticks down to the Spring Statement, Rishi Sunak may yet want to soften the blow of the immediate tax rises. After all, they may not just hurt households – but overall growth and so then the public purse.
Ultimately, the payments designed for a purpose may risk backfiring, simply due to unlucky timing.
