Hunt’s higher UK taxes could be here to stay for ‘several decades,’ IFS warns

Analysis from the Resolution Foundation shows tax increases will deliver a permanent 3.7 per cent income hit to typical households

Britain's Chancellor Jeremy Hunt makes his autumn budget statement in the House of Commons. AFP
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Large tax increases unveiled by Britain's Chancellor could remain in place for "several decades," a think tank has warned.

Jeremy Hunt set out his plans for £55 billion ($65.39 billion) in tax increases and spending cuts on Thursday against the backdrop of bleak economic forecasts from the Office of Budget Responsibility (OBR), underlining the damage caused by the war in Ukraine.

The Institute for Fiscal Studies said the effect will result in a drop in living standards that will "hit everyone" but that "Middle England is set for a shock".

"The truth is we just got a lot poorer," said Paul Johnson, the economic think tank's director. "Higher taxes and a bigger state" are likely to stay for the "next several decades", he added.

"The expectation is that incomes will fall, really quite dramatically over the next couple of years, as earnings rise much less quickly than prices, and taxes rise as well," he told Sky News.

"Because we have got poorer and because we are spending an awful lot more on debt interest as a result of all that borrowing we have been doing, the state as a whole is getting bigger and taxes are going up. And there is still not a lot left for public services."

Analysis from the Resolution Foundation showed tax increases would deliver a permanent 3.7 per cent income hit to typical households ― substantially greater than the impact on top earners.

Uprating of benefits in line with inflation would make a “huge difference to those on low-to-middle incomes”, the foundation said, but the focus on “stealthy” tax threshold freezes to raise revenue would extend far beyond high earners.

Speaking on Radio 4's Today show on Friday, Mr Hunt said it is not possible to fill the country's large financial black hole by focusing only on the rich.

"It’s not possible to raise £25 billion of taxes by just focusing on a very small group of very rich people. And I am being very open about that," he said.

"What we are doing with this package, it’s a very balanced package, is to ask people who have more to contribute more. But also a big package to support people on the lowest incomes, with big increases in the national living wage, the triple lock for pensioners. Big help for people’s fuel bills next year and support for the NHS and schools."

A typical household faces a permanent 3.7 per cent income hit from the measures, according to analysis by the foundation.

"[That is] the same as the top fifth of households ― and bigger than the 3 per cent income hit that the very top twentieth of households will face," it said.

Torsten Bell, chief executive of the Resolution Foundation, said the measures will make Britain poorer as a country, with households bearing the brunt of the pain.

“The big picture right now is we are all getting poorer as a country. Higher gas prices that we import as an energy importer make us poorer and we are deciding how that pain is shared.

“What the Chancellor has done today is to say households are going to bear a lot of that pain. They are going to pay more for their energy bills next year and they are going to pay higher taxes for ever. But we will also have slightly worse public services, if we have to cut public services after the next election. And that’s another way you can get poorer as a country."

In his statement, Mr Hunt announced:

· The windfall tax on big oil and gas companies will increase from 25 per cent to 35 per cent and he imposed a 45 per cent levy on electricity generators to raise an estimated £14 billion next year

· The threshold at which the top rate of income tax is paid is reduced from £150,000 to £125,140

· Electric vehicles will no longer be exempt from Vehicle Excise Duty from April 2025 to make the motoring tax system “fairer”

· State pensions will increase in line with inflation in April, the “biggest ever cash increase in the state pension”

· The defence budget will be maintained at at least 2 per cent of GDP

· It will “not be possible” to return to the 0.7 per cent overseas aid target “until the fiscal situation allows”

· Stamp duty cuts announced in Kwasi Kwarteng’s mini-budget will now be time limited, ending on March 31, 2025

· The National Health Service budget will increase by an extra £3.3 billion in each of the next two years. Mr Hunt said he wants “Scandinavian quality alongside Singaporean efficiency” in the NHS

The Resolution Foundation said that rampaging inflation as a result of the energy price shock meant living standards are expected to fall by 7 per cent over the next two years ― taking them back to where they were in 2014

The economy is predicted to contract by 1.4 per cent next year, unemployment is expected to rise by more than 500,000 while taxes are expected to reach their highest level as a share of national income since the end of the Second World War.

Speaking on Sky News on Friday in a response to a question about whether it pays to work under the plans, Mr Hunt said: “Well, we just increased the national living wage to £10.42. That’s a nearly 10 per cent increase, and that’s precisely to ensure we reward people for working and support people who are on lower pay.

“So I think we are very aware of those challenges,” he said.

“We are not pretending this isn’t going to be a difficult time for everyone. But what we have is a plan, we are protecting the NHS and schools. And when we get to the other side, you can see inflation coming right down, growth going right up, unemployment coming down.”

Addressing criticism that the budget was “not conservative” because of the raft of tax increases, he said the Office for Budgetary Responsibility said the measures will make the recession more shallow and save jobs.

“But what I would say to my Conservative colleagues is there is nothing Conservative about spending money that you haven’t got, there is nothing Conservative about not tackling inflation, there is nothing Conservative about ducking difficult decisions that put the economy on track,” he said.

“And we’ve done all of those things and that is why this is a very Conservative package to make sure we sort out the economy.”

Updated: November 18, 2022, 2:41 PM