Chancellor to deliver ‘biggest tax-cutting event’ since Thatcher

KWASI KWARTENG is set to deliver the biggest package of tax cuts since Margaret Thatcher was in No10, the Institute for Fiscal Studies has predicted, as he cancels Rishi Sunak’s plans to ramp up corporation tax and reverses April’s rise in National Insurance contributions.

Combined with extra spending, including more than £100billion to hold down energy bills, the Government is on track for years of borrowing.

But despite the deficit binge, households will still feel worse off this year due to rampaging inflation, analysts warned. Paul Johnson, the think tank’s director, said the Chancellor is ripping up his predecessor’s tax increases on a scale not seen in 34 years.

“This will actually, we think, be the biggest tax-cutting fiscal event since Nigel Lawson’s budget of 1988,” he said.

The economy has slowed to a crawl and may already be in recession, undermining tax revenues and further tipping the public finances into the red.

Mr Johnson added: “The economy is set to grow a lot more slowly than was expected [at the time of the March Spring Statement] so even without the tax cuts, it looks like the long-term deficit will be perhaps £40billion higher than expected back then, after all of the energy support package has come to an end. Add another £30billion of tax cuts and we are expecting to end up with a deficit in three years’ time at around the £100 billion mark.”

It puts the Government on track to borrow about £100billion or more a year for the foreseeable future, the IFS said. This starts with £231billion this year – up from the £99billion the Office for Budget Responsibility predicted in March – and £162billion next year, more than three times March’s £50billion forecast.

However, despite the tax cuts and very heavy spending to hold down energy bills, the average person will still feel worse off this year than last year thanks to galloping inflation which is eroding living standards.

The median worker on £29,000 will be just over £500 worse off, equating to a 2.8 per cent fall in their real earnings, the IFS estimates. Someone on £44,000 will be down more than £1,000.

Only a full-time worker on the minimum wage, earning £16,200, will find themselves keeping up with prices, eking out a 0.1 per cent rise in takehome pay this year.

Xiaowei Xu, at the IFS, said Boris Johnson’s government effectively overall implemented “a large tax rise”.

Some of this will be softened by Mr Kwarteng’s expected cuts, but overall Britons face net tax rises over the past 12 months, amounting to a roughly £500 hit for the average household.

It came as economists warned an extra 1.6 million people will be dragged into the higher rate of income tax by 2025 unless Mr Kwarteng scraps the freeze on thresholds.

Rampant inflation, combined with the decision to hold income tax bands for four years, means 7.7 million people will end up paying the 40 per cent rate in 2025, the IFS said. It means one in five taxpayers will be in the higher bracket, and amounts to 14 per cent of all adults.