The British government put a political spin on its autumn statement on Wednesday, pledging to lower National Insurance contributions for workers and boost business investment. However, even after leaving the EU, the UK’s growth remains sluggish and its public finances are under pressure.
In reality, despite cuts to National Insurance, the tax burden is expected to rise to its highest level in years, while public spending forecasts show real cuts in sector spending, although on a projected scale It looks nearly impossible to achieve, and what’s more, the amount is decreasing. National investment.
The UK’s next government is likely to be Labor, which will have to make difficult decisions. And the differences between the UK and the Republic will be highlighted, with national investment and spending increasing. Of course, it is possible that the UK could change course under a Labor government, but promises to increase spending would also come with higher taxes. This is a political trap created by the Conservative Party.
numbers
Britain’s public finances have improved slightly than expected ahead of the Autumn Statement, but remain under long-term pressure due to low growth and relatively high national debt.
The impact of inflation, which has pushed up tax revenues as prices and wages rise, has given Treasurer Jeremy Hunt more room to maneuver.
He chose to channel this almost exclusively into tax cuts, which meant there was little additional cash available for government departments. Borrowing is expected to fall from 5% of gross domestic product (GDP) this year to 1.1% by 2028-2029.
The UK spends more than 10% of its tax revenue on debt servicing, compared to less than 3% in the Republic.
However, the UK’s budget watchdog, the Office for Budget Responsibility (OBR), points out that this is based on a £19bn reduction in the real value of government spending by 2027-2028. Previously, as pressures increased, spending tended to be compounded by day-to-day spending, the report said. If that happens, future borrowing levels will rise further unless taxes are increased to compensate.
Comparison with Ireland: Strong growth and a surge in business loan income have brought Ireland’s public finances into surplus. In addition, a quarter of Ireland’s national debt is index-linked, and unlike the UK, where repayments are rapidly increasing due to rising inflation, the majority of outstanding debt has fixed interest rates, so it is unlikely that interest rates will rise. Not easily affected.
The UK spends more than 10% of its tax revenue on debt servicing, compared to less than 3% in the Republic.
In the latest budget, the state’s budget surplus is projected to be 2.7% of GNI* (total excluding distortions from multinational corporations) and 4.4% in 2025 and 2026.
However, recent corporate tax shortfalls and pressure on health spending are likely to cause these forecasts to be revised downward. It is also worth noting that the Ministry of Finance estimates that if all “excess” corporate taxes were to disappear, the Treasury would be in the red.
tax
The headline-grabbing part of the autumn statement to the public was the reduction in the main national insurance contribution rate by 2 percentage points to 10% from January.
This would be a benefit to taxpayers. But that would be more than offset by the effects of a classic budget stealth tax: the non-sliding effects of tax bands and deductions that increase the tax burden of working people.
If these are not adjusted for inflation, then as wages rise in line with inflation, your tax bill will also rise. Economists call this “fiscal drag.” The impact varies by income level.
However, income tax is set to rise by 2028/29, with an additional 4 million workers paying income tax and a further 3 million moving into higher tax rates. As a result, despite cuts to national insurance, the tax burden is expected to rise to 37.7% of GDP, the highest level in the post-war period, by 2029-2029.
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The Resolution Foundation, a think tank, says that the only groups that would be better off due to the interaction between social insurance and taxation would be those with incomes between £11,000 and £13,000 and between £42,000 and £52,000. I analyzed that.
Comparison with Republic: Ireland’s income tax system also does not automatically adjust for inflation, so taxpayers rely on the Chancellor of the Exchequer to increase their tax each year to ensure that the real value of their credits is not eroded by moving to a higher tax rate. There is. This year, credits and standard bands have increased and USC has been reduced.
But this stealth tax has also served as a quiet levy for Ireland for many years, and a key question for political parties in the upcoming general election campaign is whether to index the income tax system to annual inflation. It is. Meanwhile, a slight increase in her PRSI is warned here in order to maintain the surplus of the social insurance fund.
The OBR estimates that the UK tax burden will rise towards 37.7% of GDP over the next few years. This would bring the tax burden up from a much lower tax burden for many years to an overall Irish-style tax level. But bodies such as the Fiscal Council have warned that Ireland’s tax burden will need to rise in coming years to meet the costs of an aging population and climate change.
An interesting point is that Ireland’s tax revenue is increased by corporate tax, much of which is based on overseas activities. Excluding corporation tax, the UK’s overall tax burden is, by some calculations, slightly higher than Ireland’s.
Spending
UK spending is expected to remain around 3% of GDP above pre-pandemic levels, although spending as a share of the economy will fall from 44.8% to 42.7% of GDP.
However, many government departments and local authorities are already strapped for cash, raising serious doubts about the likelihood that the planned spending cuts will be achieved.
The OBR says that significant, and unlikely, increases in public sector productivity will be needed if service levels to the public are not to decline. Services will likely remain under pressure.
On the other hand, capital investment is expected to remain unchanged on a cash basis, suggesting a substantial decline. Instead, the government is seeking to encourage private sector investment by extending tax credits on investment spending beyond its previous end date of 2026. This is another costly measure in addition to national insurance cuts.
A key question for Irish policymakers is whether spending can continue to rise if tax revenue growth slows.
This will have some impact on investment and growth and the potential for long-term economic expansion, but the OBR judges it to be sufficiently small.
Comparison with Republic: Government spending is expected to continue to rise in Ireland, with forecasts for this year and next already under pressure due to increased health spending.
The country’s capital expenditure is also budgeted to continue increasing, from 17 billion euros this year to more than 23 billion euros by 2026. A key question for Irish policymakers is whether spending can continue to rise if tax revenue growth slows.
conclusion
In the OBR assessment, one number stands out. The standard of living, measured by the real disposable income of single-person households, is projected to fall by 3.5% in 2024-25 from pre-pandemic levels. This is the largest decline since records began in the 1950s.
Per capita living standards will not return to pre-pandemic levels until 2027 or 2028. So, despite the flagship measures in the Autumn Statement, slower growth and higher tax burdens will weigh on UK living standards. And given the unrealistic spending numbers in the latest document, the next administration will almost immediately have to choose between spending cuts and tax increases. This could become even more difficult if corporate tax growth stagnates.
Growth across the UK is slowing, with the OBR forecast for GDP to rise by just 0.7% next year and 1.4% in 2025. According to the Treasury, Ireland’s domestic economy is expected to grow by 2.2% next year.
Household living standards are rising here, largely due to the fact that inflation is eroding workers’ purchasing power and putting more people into work.
Prospects for Ireland’s next government look better than those of the UK government, but if the decline in corporation tax evident in recent months continues, the projected budget surplus from 2025 could be significantly reduced. The UK experience shows how difficult it is to break negative fiscal cycles.
A key objective for Irish policymakers is to ensure that the current fiscal advantage is maintained.