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Fiscal drag ‘not cutting through’

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Tax Policy Associates has published new data (in conjunction with WeThink, part of polling agency Omnisis) suggesting that a majority of the public believe that, after the Autumn Statement changes, they will pay less or the same amount of tax as they were paying 18 months ago. Only 28% of the 1,100 in the survey said they expected to pay more tax. This was a poll of employees, and asked about at the two percentage point cut in primary Class 1 NICs.

Tax Policy Associates points out that the NICs cut is much smaller than the extra tax likely to be raised by the continuing freeze in the income tax band thresholds (fiscal drag), particularly as inflation erodes their real value. In his introductory comments to the Institute for Fiscal Studies’ response to the Autumn Statement, Paul Johnson, IFS director, noted: ‘It bears repeating that the £10 billion or so cut in the NIC rates pales into relative insignificance alongside the long-term increase in personal taxes created by the six year freeze in allowances and thresholds. Higher than expected inflation has added around £14 billion to the size of that fiscal drag just since March, taking the total to some £50 billion. As a result, the level of personal taxation expected in 2027-28 is much the same as was expected after the March Budget. The NICs cut is essentially, though not quite, offsetting greater than expected fiscal drag.’

The Office for Budget Responsibility’s Economic and fiscal outlook publication, issued alongside Autumn Statement 2023, sets out (at para 3.8 in Chapter 3) the effect of the NICs cuts in the overall context of tax policy changes over the last two years or so: ‘This measure offsets just under a quarter of the post-pandemic personal tax rises that were announced between March 2021 and November 2022, which we now estimate will raise a combined £44.6 billion in 2028–29 (by way of comparison, this is broadly equivalent, in revenue terms, to a 10 percentage point increase in the main rate of Class 1 NICs). This is almost 50 per cent higher than our estimate in March and is driven by higher earnings growth bringing more individuals into the scope of the measures, which include the multi-year freezes in the income tax personal allowance, the income tax higher-rate threshold, and both employer and employee NICs thresholds.’

Issue: 1643
Categories: News
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