With UK in recession, calls grow louder for tax cuts to cushion the blow
[LONDON] With the UK economy now in a technical recession, economists expect Prime Minister Rishi Sunak and Chancellor of the Exchequer Jeremy Hunt to introduce measures – very likely in the form of some minor tax cuts – to soften the impact.
Sunak desperately needs to boost economic growth to prevent the Conservative Party from suffering a heavy defeat in the next general election, which must be held by January 2025.
The UK’s gross domestic product contracted by 0.3 per cent in the final quarter of last year, after having declined by 0.1 per cent the quarter before.
On the face of it, the downturn appears to be mild. A deeper analysis, however, shows that the recession could be worse than expected.
GDP per person has not grown since early 2022, which makes this the longest such unbroken run since official record keeping began in 1955. The economy has also not kept pace with population growth.
The economic team from Goldman Sachs estimates that the UK economy is 5 per cent smaller because of Brexit.
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Goldman Sachs said: “The UK has significantly underperformed other advanced economies since the 2016 referendum.” Since 2016, consumer prices have leapt 31 per cent. Trade friction and weak business investment have contributed to economic stagnation and the current recession, it said.
The Office for National Statistics said the economy grew by just 0.1 per cent in 2023. The Bank of England forecasts that output will recover slightly in 2024 but only to 0.25 per cent growth.
The rate of inflation in the UK has fallen from a peak of 11.1 per cent in 2022 to around 4 per cent today. But by and large, prices – except that for energy – are much higher than in 2022.
As a result, the average family in the UK is struggling with a sharp increase in the cost of living, which includes soaring rentals and mortgage rates.
Economists expect Hunt to allocate some £10 billion (S$17 billion) for cuts in national insurance and tax incentives to encourage more business investment.
And estate agents are hoping that he will also reduce stamp duties on property purchases to help improve sales. Tourism-related businesses have called for Hunt to reinstate the policy that would allow foreign travellers to claim 20 per cent sales tax on their purchases.
The Institute for Fiscal Studies (IFS) believes that these measures will hardly dent the nation’s tax burden.
As for the persistent demand by both public and private sector employees to be paid more, the downside would be that more people will end up in higher tax brackets.
From April this year, corporate tax will jump from 19 to 25 per cent. The combination of rising personal and corporate taxes means that tax revenue in 2024 will be £104 billion higher than in 2019, going by calculations by IFS.
This will raise Britain’s tax burden to the worst levels since World War II. To top it off, borrowings are 98 per cent of the gross domestic product, and interest payments are becoming a sizeable proportion of the country’s annual budget.
Last week, Hunt said there were “signs the British economy is turning a corner” and “we must stick to the plan – cutting taxes on work and business, in order to build a stronger economy”.
As things stand, Sunak is not expected to be in power after the election is over, given that Labour has consistently been 20 percentage points ahead of the Conservatives in numerous opinion polls.
Unless something dramatic and unexpected happens, Labour leader Keir Starmer is poised to succeed Sunak as the next prime minister.
Right-wing Tory MPs have been critical of Sunak’s performance since he entered 10 Downing Street in October 2022, but his supporters have said this is unfair, given that he took over during an economic downturn and a period of high inflation. If, as expected, he fails at the polls, Business Secretary Kemi Badenoch is the favourite to be the next Tory leader.
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