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Britain facing £100bn tax jump as immigration surge stretches public finances, IFS warns

rishi sunak and jeremy hunt
Rishi Sunak and Jeremy Hunt have frozen tax thresholds to boost revenues - PAUL ELLIS

Rishi Sunak’s raid on workers and businesses will cost the country an extra £100bn in taxes by the end of this decade just as surging net migration piles more pressure on public services, the Institute of Fiscal Studies (IFS) has warned.

The respected think tank said Britain’s tax burden would jump by 2030 as frozen tax thresholds mean inflation pushes more people into higher brackets and corporation tax weighs on businesses.

It means the tax burden is set to rise sharply even after tax cuts in the Autumn Statement. Chancellor Jeremy Hunt is reportedly considering in next week’s Budget to cut national insurance and vape tax - as opposed to income tax - after it emerged he will have less money to spend than expected.

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Britain will be paying an extra £66bn this year compared to a scenario where public finances had remained on their pre-Covid path, the IFS said. By 2028, the increase in tax revenues will be equivalent to £104bn in today’s money.

The think tank said the rising burden was the result of a conscious decision by the prime minister to increase the size of the state.

The IFS said the Chancellor’s decision to continue Mr Sunak’s tax raid would drive the tax burden from 33pc of GDP before the pandemic to a record 37.7pc by the end of the decade.

Mr Hunt has frozen income tax thresholds for six years and increased corporation tax from 19pc to 25pc last year.

The think tank also warned that surging net migration meant spending on public services per person would barely grow for the rest of the decade, fuelling a £25bn black hole in public spending.

The Government is now on course to spend £150 less per person on public services by 2028 as a larger population driven by higher immigration stretches Whitehall budgets.

The Office for National Statistics believes the population will rise from 67m in 2021 to 73.7m by 2036, with 6.1m of that rise driven by net migration.

The IFS said faster population growth could boost revenues through higher taxes. However, public sector spending per head will rise by just 0.2pc per year after the election under current plans.

The think tank said: “New long-term population projections driven mostly by higher expected net migration help increase the size of the economy but will make existing spending plans even more challenging in per-capita terms.”

The Office for Budget Responsibility, the Government’s tax and spending watchdog, expects the Government to increase spending on public services by 0.9pc on average over the next parliament.

The IFS said this translated into spending growth of 0.5pc a year per-person.

However, it added: “If we take the latest ONS population projections, the average annual growth in real-terms spending per capita falls to just 0.2pc a year.”

The IFS warned that a cash injection of £25bn would be needed to stop per-capita spending from being cut.

With little cash to spare in the Budget, this implies deeper cuts to spending in Whitehall departments outside of NHS, defence and schools, which are ring-fenced, if the Chancellor does want to maintain investment levels.

Carl Emmerson, deputy director of the IFS, said higher net migration was not automatically better for the public finances.

He said: “The temptation to the Chancellor is people coming here and working gets a bit more revenue in, but maybe he won’t give public services the cash they need to meet the extra demands, because having more people must add to the demands.”

He added: “The big win for your public finances is if people turn up without any kids, work for a bit and then go back home, as it were, because there are no childcare costs, there are no retirement costs, and there is not very much in the way of NHS costs. Whereas if they look a lot more like the people already here, it does not make much difference to the public finances.”

Mr Emmerson described the prime minister’s tax and spending legacy as “quite clearly one where there’s been an increase in the size of the state”.

He added: “It’s not all about the pandemic. Some of it looks like a response to changing demographics, for example. The [free] childcare package last year [was also] a big increase in the role of the state, which had nothing to do with a pandemic.

“I think this is a government which has decided that it wants - or can’t avoid - the idea that spending needs to be higher as a share of national income and therefore has put up taxes to do that.”

The IFS analysis comes after David Miles, an executive member of the Office for Budget Responsibility (OBR), warned that waves of new migrants would not solve Britain’s tax and spending crisis.

The Imperial College professor warned last month that it was not clear that “persistently high levels of net immigration to boost the labour force” could “generate sustained fiscal improvements”.

Separately Make UK, the manufacturing lobby group, called for the Budget and Autumn Statement to be abolished in a radical move that would see tax policies set out at the start of a Parliament and “only changed in exceptional circumstances”. Factory chiefs said investment and activity was being held back by too much change of economic policy.

A Treasury spokesman said: “We provided hundreds of billions of pounds during the pandemic and Putin’s energy crisis, and our responsible handling of the public finances since then meant that in Autumn we could significantly cut tax.

“We announced the biggest ever British business tax cut to help firms invest for less, worth £55 billion in corporate tax savings, whilst the average earner will save £1,000 in tax next year compared to what they otherwise would have done, thanks to the recent National Insurance cut and above-inflation increases to starting thresholds.”