‘Sweet and sour’ Budget combines £8 billion election year personal tax cuts with post-election plans for £38 billion of tax rises and spending cuts

Middle earners gain at the expense of pensioners and public service users

The Chancellor today announced another pre-election sweetener of further National Insurance rate cuts, taking total net personal tax cuts this election year to £8 billion and prioritising workers over pensioners. But he has left a sour taste for whoever wins the next election, with £19 billion of post-election tax rises and another £19 billion of public service cuts, the Resolution Foundation said today (Wednesday) in response to the Spring Budget 2024.

With the Budget coming less than four months after the Autumn Statement, the Office for Budget Responsibility’s (OBR) economic and fiscal forecasts are little changed overall. Slow growth means that the economy is set to be smaller in real per capita terms at the time of the next election than it was at the previous election in 2019.

Despite this, the Chancellor has pressed ahead with nearly £65 billion of tax cuts cumulatively over the next five years, with the additional 2p rate cut to employee National Insurance (NI) the biggest single tax measure. Just under a third of this has been funded by other tax rises, with the rest funded from extra borrowing. This has reduced the Chancellor’s fiscal headroom to just £8.9 billion, the second lowest since the OBR was founded.

The 2p NI rate cuts announced today, when combined with the NI rate cuts that came into effect in January and the £12 billion of tax threshold freezes in 2024-25, mean that total net personal taxes have been cut by around £8 billion in the election year.

The big winners from this approach are employees, the majority (79 per cent) of whom will pay less tax as a result next year (2024-25), with an average gain of £450. Employees earning £50,000 will see the largest tax cuts – gaining £1,200 – while those taxpayers earning £19,000 or less will be worse off, losing more from threshold freezes than they gain from rate cuts.

Taking into account all personal tax changes announced over the course of this parliament, around half (55 per cent) of affected employees will be better off. Middle earners on between £26,000 and £60,000 will see their personal tax bills fall, while lower and higher-earning taxpayers will see their taxes rise.

However, the Foundation notes that despite these tax cuts, personal taxes overall are rising, with net tax rises of £20 billion a year by 2028-29. This includes a significant increase for those over state pension age who are already exempt from paying National Insurance, with all eight million taxpaying pensioners facing tax rises averaging £960 as a result of tax threshold freezes.

While big tax cuts are coming in this election year, £19 billion of tax rises are planned for after the next election. These include three more years of threshold freezes (£10 billion), and big jumps in Fuel Duty, Stamp Duty and electric Vehicle Excise Duty next year (2025) that will each raise around £2 billion. These will see tax relative to GDP rise to its highest level since 1948, with the four percentage point increase between 2019-20 and 2028-29 amounting to £3,900 per household.

This rising tax burden, alongside post-election spending plans, will leave a sour taste for whoever is in office at that point. The Chancellor has left in place post-election departmental spending plans that with faster population growth imply £19 billion a year cuts to the day-to-day spending power of unprotected departments like Justice, the Home Office and local government by the end of the forecast period. Per-person cuts to these departments would be around 13 per cent between 2024-25 and 2028-29, equivalent to almost three quarters (71 per cent) of the cuts made during the first austerity parliament between 2010-11 to 2014-15.

Finally, the Foundation notes that for all the rhetoric around boosting economic growth, public sector investment spending – which is a key driver of growth, but low and volatile by international standards – is set to fall by a full 31 per cent as a share of GDP between 2024-25 and 2028-29, a cut equivalent to £17 billion in real terms.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“The Chancellor has delivered a second dollop of pre-election tax cuts, borrowing more and taxing the likes of non doms, vapes and energy companies to do so.

“When combined with big previously announced tax rises, this leaves a complex pattern of winners and losers. Middle earners make up the bulk of the former, while low or high earners will still see their taxes rise.

“The biggest choice Jeremy Hunt made was to cut taxes for younger workers, while allowing taxes to rise for eight million pensioners. This is a staggering reversal of the approach taken by Conservative governments since 2010. It is undoubtedly good economics, even if the politics are a harder sell.

“The tax cuts announced today to sweeten the Government’s election pitch rely on the prospect of a sour £19 billion of post-election tax rises, and the fiscal fiction that another £19 billion of cuts to public services can be delivered in a spending review that the Treasury today confirmed will not take place until after polling day.

“For all that, the big picture has not changed at all with this Budget. Britain remains a country where taxes are heading up not down – rising by the equivalent of £3,900 per household – and where incomes are set to remain below their level at the last general election when voters return to the polls.”

Notes to Editors

  • Total net personal tax changes modelled in the RF analysis include: 4p cut in the employee NI rate, 3p cut in self-employed NI rate; Abolition of Class 2 NI; freezes to the Personal Tax Allowance and Higher Rate Threshold; and, changes to the employee NI threshold.