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Spring statement 2022: ‘If Sunak wants to be remembered as a tax reforming chancellor, he is headed in the wrong direction’, says the IFS

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The Chancellor of the Exchequer, Rishi Sunak, delivered his Spring Statement on Wednesday 23 March 2022. Key announcements included:

  • a 12-month cut to fuel duty by 5p a litre;
  • an increase in the threshold after which NICs apply to earnings to align with the annual income tax personal allowance set at £12,570;
  • a proposed 1% cut to the basic rate of income tax in England, Wales and Northern Ireland from April 2024 to 19%;
  • the zero rating of VAT on the installation of energy-saving materials in residential homes in England, Wales and Scotland until 31 March 2027; and
  • from April 2023, measures to incentivise business investment by reforming capital allowances and R&D reliefs, with decisions on further reforming measures in these areas coming this autumn.

The Institute for Fiscal Studies director Paul Johnson said: ‘There are two paradoxes at the heart of today’s statement. The chancellor has managed to announce tax cuts without reducing the planned tax take from previous plans. And by saying nothing about spending, he is reducing the real-terms generosity of his plans for spending on public services. That’s what inflation does. 

‘The cuts to income tax and national insurance are effectively paid for by increasing revenues as a result of fiscal drag,’ Johnson noted. ‘The freezing of the income tax personal allowance and higher rate threshold turn out to be much bigger tax rises than first intended. As a result, almost all workers will be paying more tax on their earnings in 2025 than they would have been paying without this parliament’s reforms to income tax and NICs, despite the tax cutting measures announced today. And by keeping to previously announced cash plans for public spending, Mr Sunak is being considerably less generous to public services than he intended when he set out his spending plans in the Autumn.

‘If he wants to be remembered as a tax reforming chancellor, so far he is headed in the wrong direction,’ Johnson concluded. ‘The combination of increased NI rates and a reduced income tax rate will make the tax system both less equitable and less efficient. It will increase the wedge between higher taxes on earnings and lower taxes on pensions and unearned incomes.’

Meanwhile, Chris Sanger, EY’s head of tax policy, commented that the Statement may have signalled a fundamental change in the approach of the Treasury, with the chancellor taking a far more interventionalist approach than his recent predecessors. 
Issue: 1569
Categories: News