Hunt’s NI vow ‘not worth paper it is
Think tank raises serious issues on debt, defence spending and child benefit after Chancellor’s speech ‘No10 hasn’t changed its public spending plans at all really in the face of much higher levels of migration’ ‘There is a conspiracy of silence in not m
JEREMY HUNT’S promise to scrap National Insurance is “not worth the paper it is written on,” the head of the Institute for Fiscal Studies has said.
Paul Johnson said that abolishing such a major tax would only be plausible if other taxes increased or spending was cut. The Chancellor raised the possibility of abolishing the levy on workers’ pay in Wednesday’s Budget, saying that charging employees both National Insurance and income tax was not fair.
“The result is a complicated system that penalises work instead of encouraging it,” Mr Hunt said, as he cut employees’ NI by another 2p to 8 per cent. “Our long-term ambition is to end this unfairness.”
However, Mr Johnson said National Insurance was simply too big a cash generator for the Government to forgo. The payroll tax raises between £50billion and £60billion per year.
“Talk of abolishing National Insurance does not look realistic,” the IFS head said, adding that such a pledge was
“not worth the paper it is written on unless accompanied by some sense of how it will be afforded.”
Rishi Sunak has insisted that scrapping the levy could be achieved over time.
“I think what people can see from me, I think they trust me on these things, is that I will always do this responsibly,” the Prime Minister told broadcasters.
“We funded our current tax cuts responsibly. Borrowing hasn’t increased, we are still on track to meet our fiscal rules that have our debt falling.”
The challenge of abolishing National Insurance is not the only difficulty facing the Government. Analysis of the Budget by the IFS and others identified
Historic debt burden
Mr Johnson said a toxic combination of high debt service costs and low growth meant lowering debt in the next parliament could “prove to be the most difficult [task] of any in 80 years for a chancellor”.
“The combination of elevated debt, low nominal growth and high interest rates means that we need to be running much tighter fiscal policy than usual if we want to get the debt down,” Mr Johnson said. “Just to stop debt rising, we need to run a substantial primary surplus – that is, to raise more in tax and other revenues than we spend on everything other than debt interest. That’s something we haven’t done as a country since 2001. Even stabilising debt as a fraction of national income is likely to mean some eye-wateringly tough choices.”
Separate analysis showed the UK had seen the biggest increase in interest payments on government debt of any nation in the Organisation for Economic Development (OECD) since the pandemic began. This is because a higher proportion of Government debt is linked to inflation than in other countries and because interest rates in the UK are higher than in Europe.
The UK also borrowed more in pro
portion to its size during the pandemic. The Government’s cost of living measures drove a 5 percentage point increase in the UK’S net borrowing to GDP ratio in 2023. This was larger than the 4 percentage point rise in Israel, which was driven by the war with Gaza.
The OECD said rich countries’ borrowing was on course to hit a record high this year as they are forced to refinance debt at higher rates.
Migration double-edged sword
Forecasts show migration is helping to prop up the economy. Britain needs support because the share of people working is falling, a crisis of long-term sickness that undermines the nation’s prosperity. However, while extra workers from abroad help boost the public finances through taxes, “migrants do consume public services,” Richard Hughes, chairman of the Office for Budget Responsibility, has pointed out.
“The Government hasn’t changed its public spending plans at all really in the face of much higher levels of net migration. What that means is, in effect, a higher number of migrants is just more pressure on the existing spending on public services,” he added.
Defence spending a political choice
Mr Johnson is also sceptical of Mr Hunt’s ambition, which stops short of a promise, to boost defence spending to 2.5 per cent of GDP. The UK already spends a little over 2 per cent on the military, meeting its commitments as a member of Nato. Mr Hunt said the UK was in a strong position but that he wants to do more. He has promised that defence spending will rise to 2.5 per cent of GDP “as soon as economic conditions allow.”
As Mr Johnson notes, that is essentially a political choice. “Economic conditions allowed a £10billion cut in NIS this year. So they could have allowed a £10billion increase in defence spending instead. That would have just about met the target,” he said.
Child benefit headache
Chancellor was keen to give something to parents in his Budget.
Mr Hunt launched a review of the child benefits system to see how household income could be used to determine who is eligible for the handout. He wants to reform the system where cash is clawed back when one parent’s income rises above the cutoff threshold, which is about to rise from £50,000 to £60,000. Reform sounds sensible but is surprisingly complicated administratively. As a result, it would be more costly.
If new household income thresholds were designed to keep the cost neutral for the Government, they would create around half a million losers and half a million winners, Tom Wernham, an analyst at the IFS, estimated. Raising the threshold enough to prevent any current claimants from losing out would increase the cost by 10 per cent.
Tough times ahead
All these challenges underline the difficult choices facing the next Government, whether Mr Hunt is part of it or not.
From defence to public services to debt, fiscal pressures are not going away. “Government and Opposition are joining in a conspiracy of silence in not acknowledging the scale of the choices and tradeoffs that will face us after the election,” said Mr Johnson. “They, and we, could be in for a rude awakening when those choices become unavoidable.”