ANDREW LLOYD - DO PEOPLE REALLY WANT TAX CUTS IF THAT MEANS POORER PUBLIC SERVICES?

Do people really want tax cuts if that means poorer public services?

Andrew Lloyd, LSCA Past President and Tax Partner at RSM, considers the signals being sent out by the Chancellor of the Exchequer over his future tax plans.

Having weathered the storms whipped up when he broke key tax commitments from the Conservative party’s 2019 manifesto, it is hardly surprising that the Chancellor is signalling now which taxes he plans to cut, and by how much, before the 2024 election.

Three possibilities are being talked about.

First, a 1 per cent cut in the basic rate of income tax to 19 per cent in 2023/24, followed by a further 1 per cent cut to 18 per cent in 2024/25. This might even be accompanied by the abolition of the 45 per cent top rate of income tax.

Second, an increase in the inheritance tax threshold.

Third, a reduction in VAT on energy from renewable sources.

At one level this makes perfect sense. The tactic holds out the prospect of jam tomorrow for an electorate which is weary of restrictions and hardships, and hungry for some good news. More specifically, it may mollify voters whose trust has been shaken by a range of unforced errors and

unwelcome headlines from sleaze to Downing Street parties. That might also mitigate the damage at forthcoming by-elections.

However, while these proposals are easy to present, they risk creating problems of their own. For example, having added to the tax burdens of workers by imposing the health and social care levy, the Chancellor is likely to receive sharp criticism if he goes on to reduce income taxes in a way which leaves lower-paid workers worse off overall, but higher-rate taxpayers and investors better off.

With economic growth unlikely to fill the gap for the Chancellor, he will also be challenged to answer the obvious question: how will the tax cuts be paid for? We’re talking big numbers here. Cutting 2p off the basic rate of income tax would cost £12 billion. Looking back over recent Conservative budgets, Treasury figures point to only three tax changes which might raise that sort of money by the end of this Parliament.

First, the health and social care levy. That can be disregarded as it will be ring-fenced to achieve its stated purpose. Next is the freeze on personal allowances and the higher rate income tax threshold up to and including 2025/26. In the two years for which the Chancellor is holding out the prospect of tax cuts, that freeze will bring in more than £17 billion to the Treasury. Third, the increase in corporation tax rates will yield an extra £28 billion in those two years.

Unless they are funded by borrowing, the tax cuts will therefore be paid for either by bigger tax bills for companies or by the Treasury paying back extra taxes generated from frozen allowances and thresholds. Money with your name on it, as the saying goes.

UK taxes may have reached a historic high, but many voters recognise that the amounts they pay are still not sufficient to fix the roads, reform the NHS, sort out policing, get education back on track and address the climate emergency. If the Chancellor is hoping that in 2024 people will accept a modest tax cut instead of proper services, he is taking a huge gamble.