Little Will Help

17 November 2022


Cogito Ergo Non Serviam

Chancellor Raises UK Taxes, Cuts Spending


The Chancellor of the Exchequer, Jeremy Hunt, has just presented his autumn budget statement to the House of Commons. There was cheering from the government benches over the increased spending on schools and on increases in pensions and assistance payments in line with inflation. For the rest of the speech, however, they were silent, and appalled. He is raising taxes and reducing spending during a recession in order to fight inflation. That should reduce inflation, but it will deepen the recession. Such is the trouble with the stagflation the world is suffering. By the time the next election rolls around (by January 2025), the British standard of living will be 7% lower than it is today. This should ensure a Labour victory, and it is hard to see much of an alternative.

Focusing on the positive briefly (because there is not enough of it to require more time), The Treasury is going to spend £2.3 billion more for the next two years on the state schools. That works out to be about a thousand per pupil. This keeps a government pledge to return funding to 2010 levels in real terms.

The other positive point was the increase in pensions and assistance payments of 10.1%, which keeps the recipients even relative to inflation (more or less). This kind of indexing is fairly common around the world. The problem is that it does nothing to reduce inflation. Giving people more money to spend is expansionary, and so, this will be a headwind in bringing inflation under control.

After those two points, things get grim. Living standards are set to fall by 7% in the next two years according to the Office of Budget Responsibility [OBR]. The same group notes that 3.2 million more people will be paying income taxes under this budget. The reason is what the Brits call "fiscal drag." In American English of the 1980s, it was called "bracket creep." While tax rates and income thresholds at which those tax rates kick in remain constant, inflation brings pay increases. Making more money means one pays more in tax and sometimes at a higher marginal rate. So the extra salary and wages are eaten up with the tax bill.

Those people are the lucky ones. Others who are not so lucky will lose their jobs. Unemployment is set to rise along with prices. The OBR expects half a million will lose their jobs in the coming months. Needless to say, they will have more immediate matters to consider than their tax bills. Any benefits they receive will drive up government spending by definition.

Despite all of this, the OBR says the British economy is going to shrink by 1.4% next year, largely because of the soaring cost of living. Moreover, the UK national debt will be £400 billion higher than forecast in March. The OBR adds, "The tax burden rises from 33.1 per cent of GDP in 2019/20 to 37.1 per cent of GDP at the forecast horizon, one per cent point higher than forecast in March and its highest sustained level since the Second World War." The election in two years will happen under these economic circumstances. Labour will have to do something incredibly stupid to lose that election, and Labour Leader Sir Keir Starmer is not stupid.

© Copyright 2022 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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