Chancellor George Osborne is under pressure to shelve promised tax cuts for the well-off as he looks to plug a massive and unexpected black hole in the public finances.
In his budget on Wednesday, Osborne faces one of his toughest political and economic tests to date as he tries keep his deficit reduction strategy on course after a period of weaker than expected growth, while honouring Tory election pledges to cut personal taxes.
Some analysts believe a downturn in the global economy, since Osborne gave a rosy prognosis for public finances last autumn, has thrown his calculations off course by as much £18bn because of lower than anticipated tax receipts.
Amid warnings that he will have to impose a new round of austerity that will hit low earners hardest, the independent thinktank Resolution Foundation is calling on him to use his budget to drop tax cuts for the well-off that were a key Tory election pledge.
Research conducted by the foundation for the Observer has established that the cuts – including moves to increase the threshold at which the 40p rate of tax becomes payable from £42,385 to £50,000 by 2020 – will cost £2bn over the next two years, with 85% of the windfall going to the richest half of households.
Torsten Bell, director of Resolution Foundation, said: “Keeping on track with those commitments would mean finding £2bn over the next two years and would overwhelmingly benefit richer households.
“The priority should be supporting low- and middle-income families, instead of going down this route of expensive and poorly targeted tax cuts.”
Osborne also plans to increase the personal tax-free allowance, which is due to rise to £10,800 from April and £11,000 in 2017, reaching £12,500 by 2020. But 4.6 million low-paid workers will gain nothing from these cuts, because they do not earn enough to pay tax. Resolution Foundation says low-income families on universal credit will have two-thirds of any tax cut clawed back through reduced benefits.
Frank Field, Labour chair of the Commons work and pensions select committee, backed calls for a rethink: “Desirable as it is to increase higher-rate tax thresholds, it is a secondary issue when there are so many legitimate demands from lower-paid workers who are still waiting to experience the benefits of the recovery. Any spare money should go to local authorities to help them set up services to minimise the impact of welfare cuts because of the move to universal credit.”
With ministers also planning £1bn cuts to benefits for the disabled, Tim Farron, the Lib Dem leader, accused Osborne of hitting the most vulnerable to shore up his base in the Tory party.
“Giving help to those on middle incomes doesn’t require kicking the most vulnerable. This is a cynical choice by a chancellor at his most calculating. If he wants to find the cash, he should drop the unfair marriage tax allowance instead.”
Lone parents will be among the worst-affected by the switch to universal credit, which will result in benefits being withdrawn in combination with paying tax, leading to a deduction of up to 73p from every extra pound of earnings.
Separately, research by economists and experts at the Women’s Budget Group finds that policies planned by the government for 2015-20 will have an even more regressive effect than those of the 2010-15 parliament, hitting lone parents and single female pensioners hardest.
As he tries to stay on course for a budget surplus by the end of this parliament, Osborne is expected to use the budget to crack down on the use of so-called “personal service companies” which people use to reduce their tax bills. By setting up their own limited companies, people can avoid paying national insurance contributions and limit their liability to higher rate tax. Osborne is expected to unveil measures that will close the NI loophole.
Pension industry experts believe the chancellor may use the budget to cut national insurance relief on employer’s pension contributions. Chris Noon, partner at pensions consultancy Hymans Robertson, said: “An obvious target is the removal of national insurance relief on employer’s pension contributions. If he did this, it would raise £13.8bn a year by the Treasury’s own estimate. It wouldn’t affect pension tax relief and the impact on individuals would be marginal, particularly his heartland of voters – higher-rate tax payers. It would essentially be a tax on jobs, but it wouldn’t be a vote loser.”
Since November, the chancellor has seen projections for growth and wages slip. At the time he was handed an extra £27bn after the Office for Budget Responsibility, the Treasury’s independent forecaster, predicted that the improving economic outlook would generate higher tax receipts. Since then the global outlook has deteriorated and the UK is expected to see last year’s growth of 2.4% fall to 2% this year.
Osborne heightened concern about the impact of slowing global trade on the UK with a series of speeches that warned of a cocktail of threats and gathering storms on the horizon.
Some analysts believe the fall in economic growth means public finances could be as much as £18bn off course, forcing him to increase taxes and make even deeper cuts to public spending.
The OBR forecast that tax revenues would be more than £4bn higher in 2016-17 than its estimate for the July budget, £6.3bn higher in 2017-18 and £5.4bn more in 2018-19. These figures are likely to be revised downwards heavily.
Osborne has hinted that he wants to delay taking action until the second half of the parliament. But the scale of the problem means he will have to act if he is to meet his target of achieving a budget surplus in 2020.
The motoring organisation the AA has warned that a repeat of the Treasury’s hike in insurance premium tax is likely as he seeks to generate extra revenue to fill the hole in the exchequer.
Osborne raised the tax, which affects premiums on home and motor insurance, by more than a third from 6% to 9.5% in last year’s budget, raising average bills by as much as £100 according to some insurance industry estimates.
Transport groups are also braced for a rise in fuel duty after a six-year freeze.
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