Tax cuts prevented government from balancing the books

Chancellor should use Autumn Statement to rethink tax cuts strategy, halting cuts to corporation tax, according to new analysis.

Tax giveaways worth £32 billion this year have prevented the government from meeting its fiscal targets, according to new analysis published today by the Resolution Foundation as it calls on the Chancellor to set out a new approach to tax cuts in his Autumn Statement.

The Foundation says that expensive tax cuts implemented by the previous Chancellor – including the £17 billion annual cost of raising the Personal Tax Allowance (PTA), £8 billion of headline corporation tax cuts and £7 billion in fuel duty freezes – more than match the current budget deficit of around £30 billion that the new Chancellor Philip Hammond is projected to face in 2016-17 as he delivers his first fiscal statement.

With the cost of these tax cuts rising further over the course of this parliament – reaching £41 billion by 2020-21 – the report adds that their absence would have meant the Chancellor would also be on course to deliver an overall surplus in 2018-19.

This is despite an expected significant deterioration in the public finances detailed in research from the Resolution Foundation last week, which showed that Philip Hammond is expected to abandon George Osborne’s target for eliminating the overall deficit in 2019-2020.

The think tank’s analysis shows that while overall taxes have risen in recent years, these cuts explain why tax has played a much smaller part than spending cuts in reducing borrowing since 2010.

Coupled with weaker than expected economic growth, the report says the cuts have contributed to a cumulative £170 billion shortfall in tax receipts over the last parliament relative to projections made by the Office for Budget Responsibility back in 2010. It’s likely that projections for this parliament will also be revised down at the Autumn Statement following disappointing tax receipts growth in the first six months of this year and amid economic uncertainty following the referendum result.

Significant cuts to corporation tax have also transformed the nature of business taxation in recent years, with the headline rate falling from 28 per cent in 2010 to 20 per cent today and set to reach 17 per cent in 2020-21. This has reduced the proportion of tax receipts coming from corporation tax – and means Britain is on course to have by far the lowest corporation tax of any advanced country in the G20 at a time when the deficit remains significant.

Time for a fiscal reset?

The Foundation says that the ‘fiscal reset’ in the Chancellor’s upcoming Autumn Statement offers an opportunity to rethink the government’s approach to tax. In particular it warns that plans to narrow the tax base even further by raising the PTA to £12,500 and the Higher Rate Threshold to £50,000 by the end of the parliament, at a cost of £2 billion, should not go ahead.

The Foundation says that there are far more targeted and cost-effective ways to support ‘just managing families’, for example by increasing the generosity of work allowances in Universal Credit. Such a move would raise incomes and boost work incentives, particularly for single parents and second earners in families.

Matt Whittaker, chief economist at the Resolution Foundation, thinks the tax cuts since 2010 have been the difference between hitting and missing its deficit reduction targets.

He believes that tax cuts on this scale have clearly played a role in supporting household incomes, though around four-fifths of the £21 billion due to be spent on raising the personal tax allowance by 2020 will have actually gone to the richest half of households.

‘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. By abandoning the previous Chancellor’s pursuit of narrowing the tax base, he can ensure the government’s coffers are more resilient to future economic shocks.

‘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.’

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