Belatedly, there is a recognition that this was not a small state government. The response to the increases in NICs announced in September was relatively muted, but the October Budget landed remarkably badly with the Daily Telegraph and Spectator and a fair few Conservative MPs. The plan was to implement the announced tax increases, hold the line on additional spending bids and hope for some good news that will permit some tax cuts in 2023. There might be some revenue neutral tax reforms but, in terms of the balance between tax and spend, the big decisions were made in 2021. This suggests that the plan earlier this autumn was that 2022 should be a fiscally boring year. The prudent course would not be to use any upside sum to either cut taxes or increase spending. Triggering Article 16 in January (still possible although less likely than it was) would likely provoke a trade war and damage business confidence.īut even if there is an improved forecast from the OBR in 2022, it will be a forecast made in a period of uncertainty. We do not yet know what will happen with the Omicron variant and there may be other variants in future. There are, however, also significant downside risks for the economy. With little tucked away for a rainy day, the possibility of future tax cuts became heavily dependent on the OBR once again downgrading their COVID scarring estimate (they remain relatively pessimistic on that compared to other forecasters). When it came down to it, more of the windfall went on spending than many expected. The real choice was between either spending the windfall or reducing borrowing, perhaps with an eye on tax cuts later in the Parliament.
He had a choice between increasing spending, borrowing less and cutting taxes.Ĭutting taxes was always the least likely option, because it would have been very strange to announce tax increases one month and then tax cuts the next.
The Chancellor had a bit more money to play with because the economy had grown faster in 2021 than had been expected ,and the damage done to the long term health of the economy by Covid had been downgraded. The Prime Minister got his announcement, the Health Secretary got his money and the Chancellor not only got the tax increase necessary to pay for it, but he also got the Prime Minister to announce the increase in National Insurance Contributions. In September, the Prime Minister wanted to announce that he had solved the social care issue, the Health Secretary wanted more money for the NHS to cope with post-Covid pressures and the Chancellor – as a good fiscal conservative – wanted to ensure that any additional spending is paid for by higher taxes rather than letting borrowing take the strain.Ī deal was done.
And so they did, with a freeze in thresholds for personal taxes and a substantial increase in corporation tax rates. Years of spending restraint, pledges of high spending at the last general election and a change in the nature of Conservative support all suggested that the political reality was that taxes would go up. Nothing needed to be done straight away, but it is politically easier to announce deficit-reducing measures earlier in a Parliament rather than later.Īs for whether the tightening should be tax increases or spending cuts, tax increases were always the likely outcome. What is going on?īefore examining what this tells us about what will happen next with fiscal policy, it is worth recalling how we got here.Īt the time of the March Budget this year, it was evident that a fiscal tightening of some description was going to be necessary. All of this before any of the announced tax increases takes effect. Having announced tax increases in his March Budget, and having agreed to the Prime Minister announcing further tax increases to fund higher health and social care expenditure in September, the Chancellor is taking every opportunity to let everyone know that he is in favour of lower taxes and plans to cut taxes before the next general election. And a party compromised.ĭavid Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the recent general election. David Gauke: Oomph and optimism don’t always vanquish the doomsters and gloomsters.The unvaccinated must pay a price for their anti-social behaviour. David Gauke: We need real vaccine passports now.