Introduction
Rishi Sunak, currently serving as the Chancellor and Prime Minister of the United Kingdom, has made it quite clear that his administration has no plans to reduce the tax burden. Instead, ongoing measures like the five-year freeze on the personal tax allowance are leading to significant increases in the overall tax burden for working-class individuals.
The Five-Year Freeze on Personal Tax Allowance
The five-year freeze on the personal tax allowance, which began in 2023, is particularly troubling as it erodes the value of this allowance by approximately one-third, due to the ongoing effects of inflation. By the end of this freeze, the number of income taxpayers will increase by an additional 4 million, with total tax payments collectively rising to around ￡45 billion.
A Peak in National Tax Burden
The current 2019-2024 parliament has seen the highest peacetime increases in the national tax burden. Living standards are likely to decline by the end of this parliament, marking a significant economic shift compared to previous peacetime periods. Factors contributing to this increase include the pandemic, sluggish economic growth, hampered by Brexit, and an increasing ageing population.
Debt Servicing and Future Financial Challenges
The need for increased tax revenues is particularly driven by the cost of servicing the government's ballooning debt. Currently, one-tenth of tax revenues are dedicated to this purpose, and post-pandemic debt servicing costs have risen by 2 percentage points of the entire national economy. By 2026-2027, debt servicing is expected to be ￡109 billion higher than the departmental budgets for defense or transport.
To illustrate this steep increase, the November 2023 forecast from the Office for Budget Responsibility (OBR) shows a worrying trend. The dotted green line in the top left of this forecast represents the projected growth in debt servicing costs.
Shadow Chancellor's Plans for Future Finance
Despite the current administration's approach, the future of UK taxation remains uncertain. Shadow Chancellor Rachel Reeves is poised to take over as the next Chancellor before the end of 2024. Once in office, she will face numerous pressing financial decisions, many of which are challenging and require careful consideration.
Rishi Sunak's Millionaire's Tax Plan
In an attempt to boost economic activity and party support, Rishi Sunak is proposing a reduction in the millionaire's tax rate to nearly zero. This move is aimed at attracting more millionaires to live in the UK and potentially encouraging them to donate to the Conservative Party. However, maintaining this zero-tax policy could lead to significant financial challenges for the government in the future.
While these measures may seem beneficial in the short term, it remains to be seen how they will impact the overall economy and the financial health of the UK in the long run. The upcoming changes in leadership and policy direction will play a crucial role in determining the future of taxation in the country.