If last autumn was an exercise in showing how quickly economic narratives can change – as demonstrated by the sudden shift from September’s growth-focused ‘mini’-Budget to November’s purse-tightening update from new management – it was at least necessitated by the upheaval caused by Liz Truss and Kwasi Kwarteng’s policies. The run-up to this year’s Autumn Statement was mercifully free from such drama, and yet the change of tack in recent weeks has been no less sudden. It was only last month that Chancellor Jeremy Hunt ruled out tax cuts; this month he has slashed two percentage points off the main National Insurance rate.
The rationale stems from two distinct sources: a better-than-expected fiscal position and the looming arrival of a general election next year. Neither, however, is a particularly persuasive motivator. The improved fiscal position has been driven by inflation: tax cuts were financed, according to the Office for Budget Responsibility (OBR), largely by “a £19.1bn [future] erosion in the real value of departmental spending” as the body updated its inflation forecasts. And those tax cuts still pale in comparison to the money raised last year, again effectively as a result of inflation: the national insurance cut amounts to less than a quarter of the increased revenue resulting from the continued freeze to income tax thresholds.
The value of that freeze to the government should not be underestimated: add them to other threshold changes in 2022, mix in OBR’s more realistic inflation forecasts, and receipts are now predicted to rise by £12bn in this tax year, £27bn in the next, and continue growing until they reach £44bn by 2028-29.