Economists have recently revealed that Rishi Sunak’s decision to freeze tax thresholds will result in an additional £75 billion for the Treasury. This has led to mounting pressure on the Chancellor to reduce taxes, particularly in light of the recent by-election defeats in Tamworth and Mid-Bedfordshire. The impact of this freeze on workers is equivalent to a 9p-in-the-pound increase in income tax, prompting Tory MPs to call for a reduction in the tax burden on families.
The personal income tax allowances and thresholds were frozen in the March 2021 Budget by Mr Sunak, the former Chancellor, without any adjustments for inflation. Originally intended to remain in effect until the 2025-26 tax year, the freeze was subsequently prolonged until 2027-28 by the current Chancellor, Jeremy Hunt.
The Growth Commission, comprising renowned economists from the UK and abroad and established by former Prime Minister Liz Truss, initially aimed to generate £8 billion. However, taking into account the impact of inflation and wage hikes, the commission has now projected that the ‘fiscal drag’ will result in a substantial boost of £75 billion.
The recent surge in support for the Labour party has caused alarm among the Conservative party, with some pollsters predicting a significant reduction in Tory seats if the trend continues. In response, some members of the Conservative party have urged No 10 to consider measures such as reducing stamp duty or abolishing inheritance tax to regain public support. However, Chancellor Rishi Sunak has prioritized reducing inflation and the UK’s debt burden. Despite this, there are reports that the spring Budget may include an announcement regarding an increase in the threshold for paying the 40% higher rate of income tax.
The MPs’ case has received a significant boost with the release of figures indicating that Government borrowing in September amounted to £14.3 billion, a lower amount than the anticipated £20.5 billion projected by the Office for Budget Responsibility. In an article discussing the recent by-election defeats, former Cabinet Minister Sir Jacob Rees-Mogg highlighted the current tax levels, which he described as the highest in 70 years, as a contributing factor to the lack of motivation among Conservatives to participate in the voting process.
Former International Trade Minister Marcus Fysh emphasized the necessity for immediate implementation of practical tax cuts that stimulate growth and reduce inflation. This measure aims to effectively showcase our commitment to supporting the people. According to a source from the Treasury, the Prime Minister and Chancellor are keen on reducing the personal tax burden at the earliest opportunity. However, the top priority remains reducing inflation. The concern is that if taxes are cut prematurely and a significant amount of additional demand is introduced into the economy while inflation is already high, it could lead to even higher prices and interest rates. Professor Douglas McWilliams, a member of the Growth Commission, has expressed his opinion that if taxes are to be increased, it should be done transparently without resorting to covert methods.