Economy

As Its Economy Sputters, Britain Cuts Taxes Ahead of Election

With a general election at most 14 months away, the British government said on Wednesday that it will cut taxes for millions of workers starting early next year.

Jeremy Hunt, Britain’s top financial official, announced a slew of measures intended to jolt the nation’s stagnant economy by encouraging corporate investment and pushing more people into the work force. At the same time, his political party, the Conservatives, hopes that the tax giveaways will improve its electoral chances, as it languishes 20 points behind the opposition Labour Party in the polls.

National insurance, a tax paid by employers and workers that funds state pensions and some benefits, will be cut by two percentage points to 10 percent for employees, Mr. Hunt said,saving an average employee about 450 pounds ($560) next year. This tax is separate from other income taxes, which were not changed.

The government will also expand tax breaks for business investment and reduce taxes for the self-employed, Mr. Hunt said. In total, the measures introduced on Wednesday would increase business investment by £20 billion a year, he said.

“Because of the difficult decisions we have taken in the last year,” Mr. Hunt said in a speech to lawmakers in Parliament on Wednesday, inflation is slowing and government borrowing is lower than previously forecast. “I said we would cut taxes when we could, but only responsibly and only in a way that did not fuel inflation,” he added.

In recent days, government officials including Prime Minister Rishi Sunak have said the British economy had turned a corner that allowed for tax cuts. Last week, data showed that Britain’s inflation rate had dropped to 4.6 percent in October, and Mr. Sunak declared victory in his pledge to halve inflation this year.

But the country’s economic outlook is still weak. Though inflation is at its slowest 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 projected that economic growth would flatline through 2024 and into 2025. At the same time, the country’s debt pile is already about 98 percent of gross domestic product, the highest since the 1960s, and the cost of servicing that debt has risen because of higher interest rates and rising prices.

In the past few years, Britain’s public finances have been hit by the pandemic and £104 billion in support for households during the recent energy price shock. The government’s fiscal credibility was also severely damaged by the unfunded tax cuts of Liz Truss’s short premiership. When Mr. Hunt was installed as chancellor of the Exchequer a year ago, he took a cautious approach to the nation’s money and abandoned nearly all of Ms. Truss’s plans. He said there was little scope for spending increases and tax cuts.

Now, with the election in sight, Mr. Hunt has found the money to offer some sweeteners, like lower taxes and even a freeze on the alcohol tax. He is able to do this and still follow fiscal rules because of a squeeze on government spending that is scheduled to start after 2025 and static public investment.

Because of that squeeze on spending, “there’s a material risk that those plans prove undeliverable and today’s tax cuts will not prove to be sustainable,” Paul Johnson, the director of the Institute for Fiscal Studies, said in a statement.

The Office for Budget Responsibility, which provides independent forecasts for the government, said Mr. Hunt’s plan would reduce debt levels to 94 percent of gross domestic product in five years, in line with the Treasury’s rules.

The fiscal watchdog also updated its economic and inflation forecasts. On growth, it was more optimistic than the central bank, projecting the economy would grow 0.7 percent next year, though that is much lower than the 1.8 percent growth the office forecast six months ago. It slightly lowered the forecasts for the following few years because of the impact of higher interest rates and more persistent inflation.

Britain’s inflation rate would slow to 2.8 percent at the end of next year before meeting the central bank’s target in the first half of 2025, a year later than the watchdog previously forecast.

For months the government has said combating inflation was its top priority, and, until recently, there was little expectation of any tax reductions in Wednesday’s fiscal statement. But Mr. Sunak has been trailing in the polls and under pressure from the right wing of his party to cut taxes ahead of the general election, which must be held by January 2025.

This week, Mr. Sunak signaled a switch in emphasis, saying he had made “difficult decisions” on inflation, such as resisting big pay raises for striking public sector workers. “Now you can trust me when I say we can start to responsibly cut taxes,” he said.

While the cut to national insurance might generate some positive headlines, few people are likely to feel much better off. That’s because a freeze on the thresholds for different income tax brackets, announced by Mr. Sunak when he was chancellor, has meant people pay more taxes as their wages have risen in the recent high inflation period. The cut to national insurance offsets only about a quarter of the increase in tax burden generated by the frozen income tax thresholds, the Office for Budget Responsibility said on Wednesday.

And so, British tax revenues are expected to rise to 38 percent of gross domestic product, the highest tax burden since World War II, the watchdog said. This Parliament, which took office in 2019, is set to be the biggest tax-increasing one since comparable records began, according to the Institute for Fiscal Studies.

Several of Mr. Hunt’s measures targeted some of the most intractable issues holding back the British economy.

He aims to spur more business investment by making tax breaks for capital spending permanent. Previously, companies could write off 100 percent of their investments only until 2026. The measure means companies get £250,000 off their tax bill for every £1 million invested. It is expected to cost the government about £9 billion a year.

Mr. Hunt called it the“largest business tax cut in modern British history.”

Although the government has been accused of falling behind on funding its commitment to cut greenhouse gas emissions and insufficiently supporting infrastructure building, Mr. Hunt announced plans to accelerate investment in clean energy and the green transition. He said he would take steps to speed up planning applications, connecting to the electricity grid and providing compensation for people living near new pylons and electricity substations.

Mr. Hunt also said £4.5 billion would be steered toward the manufacturing sector, particularly for clean energy and automotive, aerospace and the life sciences industry. But the funding would not be available until after 2025, or after the next election.

Before Wednesday’s statement, the Treasury had announced some measures to get more people into work. The number of Britons out of the work force has been pushed higher by an increase in long-term sickness, including mental health conditions.

Over 100,000 people each year are approved for state benefits “with no requirement to look for work because of sickness or disability,” Mr. Hunt said. “That waste of potential is wrong economically and wrong morally.”

One new measure would mean people receiving benefits risked losing payments if they didn’t show sufficient progress or engagement in looking for work.

The government also announced an increase in the hourly minimum wage by nearly 10 percent to £11.44, and said it would extend it to 21-year-olds.

Stephen Castle contributed reporting.

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