While voters in Great Britain may be cheering the prospect of pre-election tax cuts, a new report by the Resolution Foundation indicates the celebrations could be short-lived. Find out how you could be affected
A statement from the UK think tank the Resolution Foundation, has revealed that the £20 billion tax cuts announced by the Chancellor are dwarfed by the £20 billion in tax increases already implemented and a further £17 billion planned for the next Parliament. This “sandwich” effect paints a different picture of the government’s fiscal policy, raising concerns about long-term sustainability and potential post-election austerity measures.
What does this all mean?
The government has some extra money because interest rates are going down. They could use it to pay off debt, but instead, they might cut taxes before the next election. Why? To attract votes.
James Smith, Director of Research at the Resolution Foundation, explains, “What Britain is being offered is really a ‘tax sandwich’. Juicy tax cuts in this election year are sandwiched between far bigger tax rises already introduced last year. And highly unusually the government has already announced plans for a chunky package of tax rises that will come into effect after polling day.
He continues, “History also tells us those future tax rises will be even bigger, as governments tend to hike taxes early in a new parliament. Implausibly large cuts to public services that are pencilled in for after the election mean history may well be about to repeat itself.”
The Resolution Foundation report details the tax rises:
- £20 billion already implemented: This includes freezing personal tax thresholds, increasing Corporation Tax, and other measures.
- £17 billion planned for after the election: This includes a Spring 2025 Stamp Duty rise, extending personal tax threshold freezes, and other yet-to-be-announced measures.
Possible tax cuts:
The planned 5p increase to fuel duty planned for 23rd March will be scrapped or postponed at a cost of £2 billion next year, while cutting the basic rate of Income Tax by 1p or cancelling the Personal Allowance freeze in 2024-25 would both cost £7 billion each.
- Lower the fuel tax by 5p (costs £2 billion)
- Reduce income tax slightly (costs £7 billion). The report authors suggest a cheaper option would be cutting employee National Insurance again by 1p, at a cost of £5 billion.
- Other options include raising the Child Benefit withdrawal threshold from £50,000 to £70,000 (costing £2 billion) or abolishing it altogether (costing £4 billion).
But before you start celebrating, things are not so rosy. While people earning a lot might get a tax break, cutting the income tax rate while freezing the allowance might actually increase taxes for people earning less than £38,000.
Op-Ed
In essence, these tax cuts might feel good in the short term, but they’re essentially a one-off insulin-induced starter before a much larger, less palatable main course. The bigger story here is that taxes are set to rise significantly in the coming years, potentially putting pressure on freelancers, their household finances and overall economic growth.
A smart move by any freelancer or self-employed individual would be to act fast once any tax cuts are brought in. Use those savings no matter how small to pay off debt, put into an ISA, a pension, and without hesitation an emergency fund. With geopolitical tensions rising by the day, the government may have no choice but to pile on the public debt as other nations have, to fund the military and efforts carried out by its allies.
Until then, there is hope that the recession will be short-lived as suggested by Bank of England Governor Andrew Bailey’s upbeat speeches of late. But it is also promising to know that BOE insiders, such as members of the Monetary Policy Committee’s Swati Dhingra are also pushing for a rate cut.
