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Scrap plans to take more workers out of income tax, Hammond urged

Published 02/11/2016

Chancellor Philip Hammond is poised to
Chancellor Philip Hammond is poised to "press the reset button" on the Conservatives' tax policy

Chancellor Philip Hammond should use this month's autumn statement to ditch plans he inherited from George Osborne to take more workers out of income tax, a new report has said.

Former prime minister David Cameron promised in 2014 that a Conservative Government would raise the threshold for income tax to £12,500 by 2020, taking 1 million low-paid workers out of the tax altogether and cutting bills for 30 million more. At the same time, he said Tories would raise the level for the 40p upper rate to £50,000.

But the Resolution Foundation - which works to improve the living standards of low- and middle-income households - warned that the bulk of the £2 billion tax break will go to wealthier households, while making the British state increasingly dependent on a shrinking tax base of top earners for its income

Poorer families would benefit more from making the Universal Credit more generous, it said.

It urged Mr Hammond to drop the plan as part of the "reset" of the Government's approach to tax and spending policy he has promised in the November 23 statement.

In its report, the think tank blamed a series of "unaffordable, unfair and unwise" tax giveaways by Mr Osborne for preventing the Government from meeting its targets to eliminate the UK's budget deficit and get the nation's books into surplus.

Despite his austerity rhetoric, the former chancellor lavished massive amounts on a series of expensive tax cuts during his time at the Treasury, including £17 billion annually on earlier rises in the personal tax allowance (PTA) threshold, £8 billion on corporation tax cuts and £7 billion on freezing fuel duty, said the report.

They contributed to a £170 billion cumulative shortfall in projected tax receipts between 2010 and 2015.

Together, the giveaways are worth £32 billion this year, more than matching the £30 billion budget deficit which Mr Hammond is projected to face for 2016/17, said the Foundation.

Without them, Mr Hammond would be on course to deliver a surplus in 2018/19. Instead, the cost of the tax cuts is expected to rise further to £41 billion a year over the course of the Parliament, forcing the Chancellor to abandon Mr Osborne's surplus target.

Although the successive increases in the PTA threshold would benefit people earning between £8,100 and £110,000 to the tune of up to £765 by 2020, Resolution Foundation analysis found that 80% of these gains went to the richest half of households, said the report.

It found that increases in the threshold had also contributed to a "significant" narrowing of the UK tax base, which has seen the share of the population paying income tax dropping from a high of 53% in 2007 to 46% now.

Partly because of this narrowing, the richest 10% of households now account for 40p of every £1 of income tax raised, up from 25p in 1977.

The foundation warned that this left the economy exposed to shocks that disproportionately affected a relatively small group of top earners.

And it warned that the proportion of tax receipts coming from corporation tax has been reduced by cuts in the headline rate from 28% in 2010 to 20% now, and set to reach 17% in 2020/21.

Foundation chief economist Matt Whittaker said: " 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.

"And 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."

A Treasury spokesman said: "The Government has made significant progress in cutting the deficit, which is down by almost two-thirds since 2010, and we have done so in a way that supports households and economic growth.

"Our action to raise the personal allowance has taken 4 million of the lowest paid out of income tax, helping to make sure that work always pays, and onshore corporation tax receipts have increased by 20% since 2010."

The Treasury said that the proportion of individuals aged over 16 paying income tax was expected to be 56% this year and 57% by the end of the decade.

Shadow chancellor John McDonnell said: "This report underlines Labour's argument that the Government's economic priorities have been wrong, and they must now urgently reconsider their determination to cut corporation tax to benefit big business.

"The size of these giveaways underlines that slashing Employment Support Allowance, Universal Credit and local council funding was unnecessary and a clear example of the Tories' skewed priorities.

"Austerity is a political choice, not an economic necessity. Labour would instead invest for the future to deliver growth that can be shared across the country, so that nobody and no community is left behind."

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