Tax cuts alone won’t solve UK’s productivity problem

“The Chancellor unveiled a budget for growth which is expected to boost the level of GDP by 0.3% on average. While the package of net giveaways worth £17 billion takes advantage of the recent windfall in the public finances, the prospect of higher interest rates, demographic pressures, and a slowing economy leaves the Exchequer vulnerable to a sudden reversal of fortune.

“The Government’s ambition to cut taxes is virtuous but impractical at a time when debt is still rising and inflation is well over 2%. Reducing the rate of employee National Insurance is a relatively regressive policy which doesn’t benefit those on lowest income. In addition, a 2p cut won’t be enough to offset the impact of threshold freezes which are already in place. Despite all the fanfare, household budgets will continue to be squeezed by tight monetary and fiscal policies, with the tax burden set to reach 38% of national income by 2028-29.

“With 2.6 million people out of work due to long-term sickness it’s unsurprising that the Government are looking at ways in which they can assist more people with health conditions to work.  Boosting labour market participation would help the country economically, but more could be done to assist that process, such as reforming childcare support and raising state pension age.”

“A new set of tax concessions for businesses demonstrates that there is no magic wand for solving the productivity challenge. Making the full expensing permanent is a relatively expensive measure which covers less than a third of business investment, excluding most investment by the service sector. Although what’s been announced is an improvement relative to the original policy, business investment will likely remain depressed next year on the back of elevated interest rates and pre-election uncertainty.

“Extending the freeport tax reliefs is another example of policy that works in theory but not in practice. The value-for-money case rests on the degree to which freeports boost output for the whole economy, and the evidence suggests that the positive impact is largely through displacement of activity at the expense of other areas.

“With these announcements relying on relatively optimistic projections for the economy, a slowing labour market and high levels of corporate insolvencies will act as a headwind to tax revenues, putting a question mark around the Government’s future ability to balance the books. The OBR estimates headroom against the debt target at just £13 billion, compared to an average level of £27 billion since 2010. This will probably mean that there is more work to do to get debt on a falling trajectory than many expect.”

-ENDS-

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