Philip Hammond MP. Photo credit: NATO Summit Wales 2014 via photopin (license)

Powered by article titled “Philip Hammond urged to shelve tax cuts and help poorer families” was written by Heather Stewart Political editor, for The Guardian on Wednesday 2nd November 2016 00.01 UTC

Philip Hammond should cancel planned tax cuts for businesses and wealthy households in his autumn statement this month and instead take action to shield poor families from the impact of Brexit, the Resolution Foundation thinktank has said.

With his first major set-piece statement as chancellor due on 23 November, Hammond is under pressure – including from MPs on his own backbenches – to alleviate the looming double blow to living standards from rising inflation and a series of benefits cuts that will bite in the year ahead.

In a detailed analysis of the public finances over the past five years, the Resolution Foundation found that Hammond’s predecessor, George Osborne, could have eliminated the deficit in the public sector finances if he had held back on making a series of tax cuts, including repeated reductions in corporation tax.

“The £32bn worth of tax cuts announced since 2010 has been the difference between the government hitting and missing its deficit reduction targets in the last parliament, or indeed in this one,” said Resolution’s chief economist, Matthew Whittaker.

He calculated that the £17bn annual cost of raising the personal tax allowance, together with £8bn on cutting corporation tax and £7bn for repeatedly freezing fuel duty, would have more than outweighed the expected £30bn deficit on the current budget this year.

Further tax breaks are in the pipeline, including increases in the personal allowance, which is due to rise to £12,500, and more cuts in the corporation tax rate, already among the lowest in industrialised countries.

But Whittaker argues that these changes will further narrow the tax base – making revenues more vulnerable to future downturns – and the government should focus instead on helping the “just managing” families Theresa May has said she wants to support.

“With the chancellor indicating that he will press the ‘fiscal reset’ button in his autumn statement, now is the time to rethink the government’s tax policy,” said Whittaker.

“If he wants to use any fiscal leeway to support the incomes of just-managing families, increasing work allowances in universal credit offer a far more targeted boost to living standards than costly further increases in the personal tax allowance.”

The shadow chancellor, John McDonnell, said: “This report underlines Labour’s argument that the government’s economic priorities have been wrong, and they must now urgently reconsider their determination to cut corporation tax to benefit big business.”

He added: “The size of these giveaways underlines that slashing employment support allowance, universal credit and local council funding was unnecessary and a clear example of the Tories’ skewed priorities.”

Raising the tax-free personal allowance was a Liberal Democrat policy that was enthusiastically embraced by the Conservatives during the 2010-15 coalition. But the gains from successive increases have been felt by households higher up the income scale.

The former work and pensions secretary Iain Duncan Smith has urged Hammond to use the autumn statement to cancel further increases in the personal allowance and use the proceeds to reverse planned cuts to universal credit.

Rising inflation, as a result of the sharp decline in sterling on the foreign exchanges after the EU referendum, is likely to exacerbate the impact of planned benefits freezes.

Osborne announced in his summer budget last year that working-age benefits would be frozen in cash terms for four more years. Analysis from tax thinktank the Institute for Fiscal Studies last month suggested that would cost 11.5 million families an average of £360 a year – up from £260 when the policy was first announced.

The IFS said at the time: “While it is perfectly reasonable to argue – as the 2015 Conservative party manifesto did – that the working-age benefit system should be made less generous over this parliament, it is hard to see why the appropriate size of cut should be arbitrarily determined by the impact of movements in sterling on prices.”

The corporation tax rate was cut from 28% in 2010 to 20% today, and is due to be reduced to 17% by 2020-21. In the wake of the referendum in the summer, before he was fired by May, Osborne suggested he would cut it still further, to just 15%, to help build a “super-competitive economy” outside the EU.

The independent Office for Budget Responsibility will publish its first assessment of the impact of the referendum result on economic growth and the public finances alongside Hammond’s autumn statement, and businesses are likely to comb his statement for clues about how the government will approach the complex negotiations ahead. © Guardian News & Media Limited 2010

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