Budget 2021: Taxes to rise to record levels and will hit middle earners, economists say

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Millions of people will be worse off next year with record levels of tax which could rise even higher over the next decade, leading economists warned today.

Budget 2021: Taxes to rise to record levels and will hit middle earners, economists say
© PA Budget 2021

The Institute for Fiscal Studies said Rishi Sunak had given himself leeway to lower taxes by some £7 billion in the run-up to the next election, expected in 2024.

However, the highly-respected economic think tank believes these reductions are likely to be only “temporary” and that in the years after people have gone to the polls the tax burden is likely to go up again and by even more.

“I would be very surprised if the tax burden in a decade’s time is less than it is now and indeed I would not be at all surprised if it is more,” IFS director Paul Johnson told BBC Radio 4’s Today programme.

“That is an inevitable consequence, partly of growing richer, all be it slowly, but also a consequence of demographic change in an ageing population.”

In its verdict on the Budget and Comprehensive Spending Review, the IFS said:

* The Chancellor had made “historic tax increases”, upping them by £40 billion this year, to plough billions more into the NHS, to tackle the social care crisis and boost spending for other Whitehall departments.

* A middle earner is likely to be “worse off” next year than currently as high rates of inflation and tax rises “more than negate small average wage increases”.

* Despite Mr Sunak opening the public spending taps, voters “may not get much feelgood factor” as high inflation, rising taxes, and poor growth, “still undermined more by Brexit than by the pandemic”, will see real living standards barely rising and, for many, falling over the next year.

* There was a “genuinely significant increase right across the board” on spending for Whitehall departments including for the prison system, local government and further education.

* By 2024, spending on health will have gone up by more than 40 per cent since 2010, but on education by just three per cent which could be seen as “a remarkable lack of priority afforded to the education system”.

* Spending per student in further education and sixth form colleges will remain “well below 2010 levels” which did not look “consistent with a long term growth strategy. Or indeed levelling up”.

* Some town halls may have to make further cuts to services over the next few years despite a “real increase in spending power” given social care demands.

* Low income households face “real pain” from the rise in inflation.

The IFS says the tax burden will rise next year to the highest sustained level ever due to the increases in corporation tax, freezing income tax thresholds, and National Insurance contributions, the latter to pay for a £12 billion boost to the NHS and social care.

Mr Sunak admitted today that he was “uncomfortable” with the tax burden and said it was “his mission” to reduce taxes by the end of the parliament in 2024.

Video: Key points from the Chancellor’s Budget (Wales Online)

“I acknowledge the tax burden is high, it’s not something I am comfortable with, it’s the result of us suffering the worst economic shock we have had in 300 years and the response that we put in place to that to help get the country through that,” he told ITV’s Good Morning Britain.

According to independent fiscal watchdog, the Office for Budget Responsibility, taxes are now at a level not seen since the early 1950s. Rather than use a £35 billion fiscal windfall provided by OBR forecasts to reduce recent tax rises, the Chancellor chose to boost spending for Government departments by £150bn a year by 2024/25 and to set money aside to restore the public finances.

He also used the extra cash to deliver a £2bn ‘cut’ to the taper on Universal Credit, a reduction in business rates and a reduction in duties on some beers and British sparkling wines.

But the OBR forecast a sharp rise in inflation to over four per cent in the coming year, adding pressure to already squeezed household incomes.

Many Tory MPs are questioning the tax rises and higher spending, which are squeezing the political ground for Labour.

Former Cabinet minister John Redwood tweeted: “Before releasing large new sums to spend the Treasury needs to agree how the money will be spent. People want to know there will be big improvements if they have to pay more tax. When I go to a shop I want to see the goods before passing over the payment.”

But Mr Sunak played down concerns that his big spending, high taxes approach to managing the economy was ‘un-Conservative’.

He added: “We are now, because of the success of our plan, able to fund strong public services, back businesses, invest in our growth and crucially start that journey of reducing taxes for people.”

Torsten Bell, from the Resolution Foundation think-tank, said the Budget was “good news on public finances but pretty bad news on household finances”.

Many Tory MPs are questioning the tax rises.

Former Cabinet minister John Redwood tweeted: “Before releasing large new sums to spend the Treasury needs to agree how the money will be spent. People want to know there will be big improvements if they have to pay more tax. When I go to a shop I want to see the goods before passing over the payment.”

Mr Johnson believes the Chancellor has used the pandemic as “cover” to raise spending on public services which was “probably necessary”.

He told Talk Radio: “If he really does want to get the tax burden down over the long-run then he needs to find some way of saying ‘look, I’ve found a way of giving you the public services you want, oh British public, for less than we have historically been able to fund them for’, or find some magic key to much faster economic growth”.

Meanwhile, the Resolution Foundation (RF) have said the tax bills for households will be £3,000 higher since Boris Johnson became Prime Minister as a result of changes announced in the Budget.

The leading think tank also said the poorest fifth in the country will be around £280 a year worse off as a result of the £20 cut to Universal Credit.

Researchers said three-quarters of households on UC will be worse off as a result of the changes, even with new tapering rules and a rise announced by Chancellor Rishi Sunak.

Wages are also unlikely to rise in real terms this year due to high inflation and will only increase by around 2.4% between the financial crisis in 2008 and 2024, compared to a one third rise recorded in the 16 years prior to 2008.

The calculation of taxes increasing by £3,000 by 2026/27 means the tax take will be at the highest level since 1950, RF found.

James Smith, research director at the RF, said: “We’re becoming a bigger state and more higher tax state.

“The total increases in taxes since Boris Johnson has become Prime Minister is equivalent to around £3,000 for each household in the UK, so this is a really chunky change, although most of that falls on people on higher and middle incomes.

“We’re not set for the low-tax economy that the Chancellor wants or the high wage economy that you see on the horizon.

“Slow growth is really casting a shadow over what’s happening in terms of the overall health and outlook and household finances are still in pretty bad shape and a huge challenge.”

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