Tax burden unlikely to go back to pre-Covid levels in ‘next few decades’
We’re in a “new era” of higher taxation and higher spending as a fraction of national income as a bigger state.
Charts show there is a “sharp change”, Johnson said. “I’d be most surprised if the tax burden gets down to its long term pre-Covid levels at any point over the next few decades,” he said.
On public spending, numbers aren’t too bad over the next few years, he says. It will only grow “marginally less quickly” relative to last year’s generous spending review.
The government is still not going to be able to fund public sector pay rises that anywhere near match inflation. This will remain “one of the biggest challenges” facing the government this year.
Key events
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IFS director Paul Johnson has been pressed by journalists in the Q&A what the “economic own goals” he alluded to in his opening remarks are.
He said they include the following:
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Slashing investment spending in 2010, announced by last Labour government but continued by George Osborne. “Not a good way to get growth,” he said.
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Cutting spending on education especially “huge cuts” to vocational and further education but also schools. Although schools spending is going up, FE didn’t get a mention in the autumn statement.
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Brexit “very clearly” – economically speaking that has been “very bad news indeed” and continues to be, especially because of the hard Brexit and distancing from single market.
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The mini-budget “obviously didn’t help” – “another large own goal”.
Xu said the uprating of the benefits cap is “welcome” and will come as a relief to families – but in a context where prices have increased by 24% it still represents a big cut since April 2016.
The current uprating is just keeping pace with inflation and real benefit levels won’t return to pre-pandemic levels until April 2024, she added.
Senior research economist Xiaowei Xu says real household disposable incomes will fall by 7% over the next two years.
Since 2008 we’ve seen more shocks than in previous decades – but falls over next two years are the largest since records began. This follows a “lost decade” since 2008.
We won’t return to pre-pandemic levels of household incomes until after 2027/28. We’ll be a third poorer than we would have been had pre-2008 growth trend continnued.
We’re heading for another lost decade despite a large package of government support for the cost-of-living crisis such as the energy price guarantee, she said.
This was a “tax-raising budget, but the chancellor opted for “easy revenue raisers rather than coherent reform” – this is “not a good way to make policy”, said Adam.
Taxation of property, electric vehicles and capital gains need “serious thought and well-considered reform”.
Adam said he would like to have seen the mini-budget cut to stamp duty maintained, although this will raise £1.6 bn.
He adds that capital tax gains is badly in need of reform, but cutting the tax allowance by 3/4 isn’t what he would consider a priority.
The oil and gas windfall tax will contribute an additional £19 bn to the economy – but rather than being a huge additional boost, this still only brings it up to average levels over most of the last 40 years after years of low taxation on the industry, Adam said.
This tax rise is also only temporary in the autumn statement.
Adam is sharing how the taxation system has changed dramatically in the last 30 years.
In 1990, around 4% of adults were higher and additional rate taxpayers – with the autumn statement that will rise to over 14%.
Senior economist Stuart Adam is presenting on the changes to taxation.
Freezing the income tax threshold will raise £1.3 bn over the next two years – it’s now the case that every signficant threshold is being frozen over a long time. “That’s just not a sensible way to make policy,” because it depends on what inflation turns out – it’s an “accidental and arbitrary outcome”.
Freezing employer national insurance contributions until 2028 raises £3.6bn.
Reducing the 45% rate from £150,000 to £125,000 raises £0.9bn.
Zaranko has suggested that an alternative plan would see spending on the NHS increase to 3.8% of GDP rather than 3.1%, enabling longer-term workforce planning and pay rises to address the staffing crisis.
Schools spending could be frozen, rather than facing a reduction, and defence could rise to 2.5%.
This would cost an extra £17bn, he said.
Spending plans after the next five years look “implausibly tight”, he said.
Senior research economist Ben Zaranko says that despite what we might think, the “overall generosity” of last year’s spending plans hasn’t shifted much on paper.
What’s going on? He asks.
The measure of inflation is higher in the short term, although not that much higher, and it’s forecast by the OBR to be lower in the medium term.
The measure also doesn’t include the main source of inflation in the UK – imported food and energy – but instead focuses features domestic inflation, which is lower.
These lower inflation rates flatter long-term growth in the government’s spending plans, he says.
He says local government is unexpectedly a “winner” out of the autumn statement, receiving funding that had been planned to fund the social care reforms. Extra money in the short-term for NHS and schools will be “welcome” – though there risks still being a shortfall in relation to demand.
Other budgets will be left facing a squeeze, however.
Emmerson is explaining that the UK is now a higher tax country, as more people are being pushed into the top rate of tax due to thresholds being frozen. This isn’t a problem – Scandinavian countries pay a higher tax burden. tax will now represent an unprecedented 37% of national income.
But he asks how “credible” a six-year freeze is.
Debt, he added, is barely falling over the coming years due to continued high borrowing – Hunt has “just about” got it falling although very marginally.
“There are some big risks” around the forecast the autumn statement is based on – especially on revenue, for example projected uprating of fuel duties.
IFS deputy director Carl Emmerson is presenting the outlook for the public finances and the key risks around the forecast.
He’s looking into the Office for Budget Responsibility’s optimistic forecast – it is closer to other independent forecasts than the Bank of England’s gloomier projections.
The outlook for the economy is weaker, so that adds to borrowing going forwards, he explained. The government is also now spending on debt interest at its highest share of GDP in 70 years.
But Emmerson thinks debt interest spending won’t rise as sharply as projected by the OBR, which is based on market expectations of where interest rates are going, rather than independent forecasters.
This is an area of the forecast which we can “very much hope” might turn out better than forecast.
UK economy hit by ‘series of economic own goals’
The chancellor is hemmed in by rising interest rates and dreadful growth prospects, Johnson said.
He’s allowed borrowing to rise and put off tough decision for a couple of years – hoping things will be better or it’ll be someone’s problem.
We’re reaping the costs of long term failure to grow the economy, an ageing population and high borrowing.
“What a combination,” he said.
The situation has been made worse by a series of “economic own goals”.
