United Kingdom

Income taxes to rise by £21bn despite Budget cuts

The four-year freeze to multiple tax thresholds was announced by Rishi Sunak when he was Chancellor as he sought to stabilise the public finances following the pandemic borrowing binge. 

It was announced before the surge in inflation and wages boosted the amount the Exchequer would generate from the policy. 

Mr Kwarteng has promised to push ahead with more tax cuts next year, leaving him scope to reverse the huge amounts of revenue generated by fiscal drag under the policy set out by Mr Sunak.

Fitch on Wednesday became the third rating agency to signal the Prime Minister’s tax cuts had put the UK’s credit rating at risk of a downgrade. 

Changing its outlook to “negative”, it said the plan had damaged the country’s “long standing” credibility with investors and put its debt trajectory on a path that was no longer consistent with its AA- rating.

Confirmation of the stealth tax rise will deal a blow to Ms Truss’s claim she will slash the burden of the state to unleash growth, as the IFS urged her to “kick the habit” of freezing tax thresholds.

The Prime Minister on Wednesday used her first Tory conference speech as leader to recommit to a push for economic growth after a week overshadowed by Tory in-fighting.

She echoed Margaret Thatcher by naming “enemies of enterprise” and warning “we have no alternative”, similar to two phrases used by the Iron Lady.

Ms Truss said: “I will not allow the anti-growth coalition to hold us back. Labour, the Lib Dems and the SNP. The militant unions, the vested interests dressed up as think-tanks.

“The talking heads, the Brexit deniers and Extinction Rebellion and some of the people we had in the hall earlier. The fact is they prefer protesting to doing.

“They prefer talking on Twitter to taking tough decisions. They taxi from North London townhouses to the BBC studio to dismiss anyone challenging the status quo.”

The short speech, a little over 30 minutes, made clear she was sticking to her mini-Budget package and laid out the pitch for why the drive was needed. Ms Truss promised to create a “country where hard work is rewarded” but more adults than ever will pay the higher (40pc for £50,271 to £150,000) and additional (45pc for over £150,000) rates of income tax.

The IFS said the share of adults paying income tax will jump from 63pc now to 66pc within three years, matching the record levels reached during New Labour. An all-time high of 14pc will pay the higher rate of income tax, an extra 1.6m people.

Tom Waters, economist at the IFS, urged the Government to “kick the habit” of freezing tax thresholds, warning it “smacks of lazy policymaking”.

“Worryingly, it seems like there is a growing trend towards introducing new parameters to the system that are indefinitely frozen,” he said.

“From the Treasury’s perspective, one can see that undoing such freezes might not be appealing, given the state of the public finances. But that doesn’t change the fact that there are far less opaque and arbitrary ways to raise revenue.”

Meanwhile Liz Truss was warned by Cabinet that her plan to cut benefits “will never happen” after Jacob Rees-Mogg became the latest top minister to revolt.

The Business Secretary joined fellow members of the Prime Minister’s top team in voicing disquiet at her and the Chancellor’s bid to rein in welfare spending.

It is understood he argued that increasing handouts to reflect rising prices was the only political reality amid a cost-of-living crisis.

Downing Street is exploring whether to increase Universal Credit by the same amount as average wage growth rather than by inflation as is usual.

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