Taxing the lower-paid could stop the economic recovery in its tracks

With a slew of bigger household bills approaching, Sunak is hampering growth and the green transition by being hawkish

There are plenty of nasty bills looming for the average British household that could persuade many to keep their savings firmly on deposit and prevent the economy from flourishing.

Anyone looking for a secondhand car will pay 15% more this year than last – that is, if they can find one that suits their needs. Paying monthly energy bills is no fun since world prices rocketed. And the cost of essential services such as childcare are only increasing over time.

Inflation was up 2% at the last count and many economic forecasters expect it to jump well above 3% before Christmas. The shortages of goods across much of the manufacturing and retail industries, combined with staff shortages made worse by Brexit visa restrictions, will see to that.

An increase in national insurance contributions (NICs) is also on the horizon, adding to the squeeze on incomes. Last week the government said it would ask households to cough up an extra 1.25% on their NICs from April, which accounts for around half of the extra £12bn it wants to spend on health and social care.

Separately, income tax thresholds will be frozen from next year, meaning more people will move into the higher-rate tax band.

Making matters worse, Boris Johnson conspicuously failed to rule out further tax rises. Then there are the costs that are harder to quantify, yet might make a reasonable person think twice about splashing their savings on a holiday or buying an electric car.

Climate change is being debated in ever more apocalyptic terms and it is clear the government’s financial support will be aimed at the poorest. Anyone earning around the average wage of £30,000 is going to find they need to cough up thousands of pounds to comply with new rules that aim to bring carbon emissions down to net zero.

If anything, the Cop26 conference in Glasgow in November will only heighten this anxiety, even if it proves to be more hopeful about the journey to net zero than many expect.

London’s adoption of a low-emission zone between the North and South Circular Roads is an event that underscores the battles ahead. Until now, Johnson has put his enmity with London mayor Sadiq Khan ahead of helping low-income households upgrade their old bangers to meet the standards for what will be Britain’s biggest low-emission zone. Other mayors are watching to see how Londoners react to a £12 daily charge if their cars fail to meet the new standards.

With so many extra costs coming down the track, Labour would do well to bring back Ed Miliband’s phrase “the squeezed middle” to depict the huge group of voters who can ill afford to make the transition to a green economy.

Rishi Sunak is clear that the Treasury must focus on bringing down the public debt, which, according to a measure used by the Organisation for Economic Cooperation and Development, now exceeds 140% of GDP.

The chancellor is also convinced by his own rhetoric that rising wages from all the “good jobs” he plans to create means most people can cope with rising costs.

Since last summer, the Office for National Statistics says pay growth has averaged 3.5%, which in normal times is healthy, if not spectacular. However, this improvement is likely to slip back next year, and it was preceded by a period of stagnant wages. Official figures tell us that median weekly pay for full-time employees increased by just 0.1% to June last year on the previous 12 months. Pay in the private sector fell 0.6% over the same period.

Incomes are falling in some quarters. Six million families that claim universal credit benefits will see whatever rise in wages they secure subsumed in a wave of cuts throughout October, as ministers take more than £1,000 from their annual income.

So far, what Sunak says he cannot do to support the economy is borrow more: from next April, it must be business as usual. Yet the chancellor, who increasingly looks like he is setting the agenda inside Whitehall, risks harming the recovery by taking this tough stance.

It’s not so much that he has raised the tax burden to its highest level as a proportion of national income in 50 years. It’s that he has chosen to mainly increase taxes on low- and middle-income workers, allowing the wealthy to escape higher taxes yet again.

He could spend more without raising taxes now that he is on course to borrow around £57bn less in the current financial year than the Office for Budget Responsibility (OBR) forecast back in March, and possibly enjoy even more leeway once the Treasury’s independent forecaster has revised the figures for the budget in October.

If he chooses to save most of the money in order to bring down the annual deficit, the fiscal hawks on his backbenches will cheer. Yet this victory could be his undoing if it needlessly undermines consumer confidence and harms the economy.


Phillip Inman

The GuardianTramp

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