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Jeremy Hunt’s tax traps are hurting Britain’s growth, says OBR chief

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Jeremy Hunt’s tax traps are hurting the economy because they do not make work pay, according to a top official at the Government’s spending watchdog.

David Miles, an executive member of the Office for Budget Responsibility (OBR), said the high effective tax rates facing many workers on every pound of extra income were “bad for growth”.

Mr Miles said levies that “disincentivise work, saving, investment” were also holding back the economy.

While the OBR official said the Chancellor’s decision to cut National Insurance (NI) by 2 percentage points in the Autumn Statement provided an “unambiguously positive” incentive to work, the fiscal watchdog noted that workers will still be paying more tax in five years time because of a series of stealth levies implemented by the Chancellor.

So-called fiscal drag forces workers to hand more of their pay to the taxman as wages rise because tax thresholds do not increase in line with inflation.

Mr Miles told MPs on the Treasury Select Committee (TSC): “I think what is bad for growth is high tax rates at the margin. And being able to control marginal tax rates and try and bring them down is definitely good for growth.”

The Chancellor’s decision to freeze the level at which workers start paying the basic and higher rates of income tax until 2028 is expected to drag seven million people into higher tax bands over the next five years, OBR forecasts show.

Economists have previously warned that parents of more than three children face tax rates of up to 100pc because of the way Britain’s tax system claws back benefits for higher earners.

People earning more than £100,000 also face marginal tax rates of 60pc because they lose £1 of their £12,570 tax-free personal allowance for every £2 earned above this threshold.

While Mr Miles said “just a higher overall amount of tax” was not automatically “very bad for growth”, he added that Britain’s tax burden mattered: “There are clearly disincentives to work from aspects of the tax system and disincentives to save and disincentives for companies to invest.

“So I would certainly not draw the conclusion that the tax take is kind of irrelevant to growth in the economy.”

Mr Miles said the NI cut from January would reduce “the marginal rate of tax on pretty much everybody [who] is working”.

However, this would be offset by the higher taxes facing workers overall, including some who will be forced to pay very high marginal tax rates.

“There’s a smaller group of people who face a really substantial change in the incentive to work at the margin and they will work less,” he said.

Richard Hughes, the OBR’s chairman, said the 2p tax cut in national insurance contributions would be “swamped by the fact that [workers are] drifting into higher tax bands”.

He said: “In five years time the average worker based on current policy is going to be paying more in tax because the thresholds are frozen.”

The OBR calculated last week that workers are losing almost five times as much to the stealth raid on income tax as they are gaining from the cut to NI. The long freeze on income tax thresholds will rake in £44.6bn per year by 2028-29, equivalent to a 10 percentage-point rise in NI contributions.

Mr Miles, a former Bank of England interest rate-setter, said the OBR was currently doing more work on the impact of fiscal drag on incentives to work.

He warned that stealth taxes may also in a “perverse” way be forcing some workers to take on more hours to protect their living standards. The OBR also highlighted that previous governments had not stuck to tight public spending plans, which would leave the UK in a precarious fiscal position.

Higher inflation means government spending is now projected to be £19bn lower in real terms in the next parliament compared with previous forecasts. The watchdog said history showed governments had on average increased spending by £30bn compared with initial plans.

Mr Hughes said this presented a “very big fiscal risk”, adding that a lack of detail beyond 2025 meant it was “difficult to assess spending because the government doesn’t have any spending plans”.