It looks as though some tax cuts are on the agenda tomorrow as Jeremy Hunt delivers the Autumn Statement. However, with inflation still well above the Bank of England’s target and the parlous state of the public finances, any cuts will likely be modest. Here are five tax measures which the Chancellor should prioritise.
In his Spring Budget, Jeremy Hunt introduced a measure known as full expensing. This allows firms to write off capital investment costs against corporation tax immediately and in full, rather than having to spread the tax deduction over time. This is a good thing as it acts as an incentive for firms to invest in their businesses. So far the policy has been relatively successful but we are yet to see the full benefits of the policy. This is because the Treasury decided to make it temporary, with the measure due to end in 2026. This was a mistake.
The Chancellor should announce that he will make full expensing permanent. This will give businesses the certainty and confidence that their investments will be worth it. Firms investing in equipment increases productivity. Given that productivity is the key driver of economic growth, then this is incredibly important. The UK economy has stagnated over the past decade as productivity never really recovered from the Great Recession. As such, the government should be doing everything it can to incentivise business investment. Introducing permanent full expensing would be a great way to do this.
Jeremy Hunt also needs to help working people by looking at direct taxes on their incomes. He can do this by committing to unfreezing income tax and national insurance thresholds. Many workers saw their salaries increase this year in order to keep up with inflation. However, because inflation has been so high, many households have been no better off in real terms. The Treasury froze income tax and national insurance thresholds which has led to fiscal drag where workers find themselves paying more tax and in some cases paying tax on their incomes for the very first time, despite them not being any better off. This is a deeply dishonest and unfair way for the government to raise money. The Chancellor needs to end this practice by unfreezing the thresholds and raising them in line with inflation.
The Treasury should aim to get rid of the most damaging tax on the books: stamp duty land tax. The UK’s housing market is dysfunctional due to the incredibly restrictive planning system which means it’s impossible to build enough homes. Stamp duty distorts the housing market even further by disincentivising people from moving home. This leads to land being used in an inefficient way, hampers productivity, and means the government gets less in tax revenue from other sources. Ideally the Chancellor would commit to abolishing it along with council tax and business rates and replacing them all with a Land Value Tax. Such a move would see land used in a much more efficient way and would boost productivity. I’d be very surprised if Jeremy Hunt stood up tomorrow and announced this but he should at the very least commit to a permanent cut to stamp duty.
The Treasury froze income tax and national insurance thresholds which has led to fiscal drag where workers find themselves paying more tax and in some cases paying tax on their incomes for the very first time, despite them not being any better off. This is a deeply dishonest and unfair way for the government to raise money.
It’s not all about tax cuts. The Chancellor also needs to look at reforming our incredibly long and complex tax system. It looks as though he will be increasing the VAT registration threshold and abolishing VAT on period pants. Jeremy Hunt is also under pressure from MPs and lobby groups to cut VAT on other products such as sunscreen and even dog food.
Although well intentioned, this would be a mistake. As far as taxes go, VAT is one of the best. It is not as distortionary as many others and is an efficient way of raising revenue for the Treasury. Jeremy Hunt should instead abolish all the different rates and exemptions and levy a single rate of VAT on everything, including food. This would increase the cost of living but would be a huge revenue raiser which could be used to provide targeted support for those most in need. It would be deeply unpopular, but it’s the right thing to do.
Finally, the Treasury needs to look at tax increases. It should do this by looking at fuel duty which has been frozen for the past 13 years. The fact that fuel duty has not risen in real terms for so long represents a massive subsidy to motorists at the expense of everyone else. In London motorists tend to be wealthier than the average person and they impose huge costs on people and businesses due to the pollution they cause and their impact on congestion. Unfreezing fuel duty would raise a lot of money for the government which could then be invested into improving public transport in and around London.
