Want to slim down the size of the state? Tax wealth not work and end fiscal drag
The rhetoric in Jeremy Hunt’s Autumn Statement concentrated on the importance of rewarding hard work, shrinking the size of the state and lowering the tax burden. While there were some encouraging moves such as reforms and cuts to National Insurance contributions, the actions taken by the Chancellor did not match his words.
Although National Insurance was cut, the tax burden is sky high – it is projected by the Office for Budget Responsibility to hit a whopping 37.7 per cent of GDP by 2029 representing the highest level since the Second World War. This means tax payments will have increased by over £4,000 per household since 2019. The Tories’ claim to be a tax-cutting government is, really, a stretch.
A key driver of the tax burden is fiscal drag. Over the past year many workers have seen their wages increase. However, because inflation has been so high the vast majority of households are not better off in real terms. Unfortunately, this has not stopped the government from grabbing their hard earned money. Income tax and National Insurance thresholds have been frozen and not increased in line with inflation. This has led to millions of households being dragged into higher tax bands and many now paying tax for the first time ever. Even if they haven’t moved into a higher tax band, the vast majority of people have seen their tax bill shoot up.
The current state of the economy means in many ways this cannot be helped. Economic growth is flatlining and is not expected to improve anytime soon. We have public services which need adequate funding and an increasingly elderly population. We are also spending a fortune servicing the national debt. The government must get money from somewhere, and working people are an easy target.
This might be understandable but it is not justifiable. It is wrong to increase the burden on working people, especially when they are not richer in real terms. It would perhaps be more defensible if the public had at least been asked about it – but they weren’t.
Overall this does not amount to a sustainable way to run the public finances. The old-age-dependency ratio is set to increase further as more people reach pensionable age and there are fewer working people to take their place. The Treasury will be forced to levy even more swingeing taxes on working people – destroying living standards and working incentives.
Rather than tinkering at the edges, it is time for a sweeping review and fundamental reform of public services, taxation and the economy as a whole. It is welcome that the Chancellor announced steps to improve productivity in the public sector but they were insufficient. Whilst it is encouraging to see full expensing made permanent – so as to incentivise firms to increase investment – what we need are a huge swathe of supply-side reforms. These would increase productivity in the private and public sectors and so reduce costs and boost growth.
The tax system needs to radically shift from one that penalises work and investment towards one levied on wealth and consumption. We need reforms to taxes on wealth as well as an overhaul of VAT with a removal of all exemptions and a single rate on all products
The government needs to stop treating working people as cash cows. The Chancellor needs to unfreeze income tax and National Insurance thresholds immediately in order to end fiscal drag. It’s time to be bold and start taxing unearned wealth more, and work far less.
Ben Ramanauskas is an economics fellow at the University of Oxford