Tax changes pledged in the Conservative Party manifesto today (Tuesday) would mean the tax bill for a typical employee falling by £170 a year in four years’ time. But to do this they must make £12 billion of welfare cuts. Recent history suggests this will not be achievable over the next Parliament. This, along with £21 billion of cuts to unprotected departmental spending, will be required to meet the stated aim of getting debt falling by five years’ time – raising big questions over whether this package passes the plausibility test, the Resolution Foundation said today.
The offer
The single biggest tax cut announced today was another 2p cut to employee National Insurance, costing £10.3 billion a year by the end of the next parliament. This would reduce the effective personal tax rate for a typical employee to the lowest level since 1975. But the analysis shows that the biggest gainers overall are the richest fifth of households, who are set to gain £1,300 a year on average, compared to the poorest fifth who would gain only £150 a year (and that’s not for four years).
The tax cuts announced today would still leave overall taxes going up after the election, leaving the overall tax-to-GDP ratio rising to 36.7% – its highest level since 1948.
The price
The Foundation adds that these new tax cut pledges would be paid for through £12 billion of poorly defined benefit cuts, and an unspecified £6 billion clampdown on tax avoidance. The party has provided little detail on how it would deliver the cuts to social security, but have indicated that the focus would be on health-related benefits like Personal Independence Payments (PIP) and the Limited Capability for Work-Related Activity element of Universal Credit (UC). Reducing spending on PIP by 40% would be extremely challenging to deliver, meaning either cuts to the entitlements of existing claimants, or reducing the number of claimants by 1.6 million.
Recent history gives us reason to doubt that savings on this scale can be delivered. First, the introduction of PIP saved only 7% of its original target. Second, in its 2015 Manifesto the Conservative government announced £12 billion of unspecified welfare cuts, followed later by a U-turn on important aspects, six months before any cuts were actually delivered.
The tax and spend pledges announced are on top of already announced tax rises worth £23 billion, and an implied £21 billion cut to unprotected departments like local government, courts, police and prisons.
If their optimistic plans for economic growth were to fail, it could leave an incoming Conservative government having to deliver these extremely challenging spending cuts, while at the same time cancelling some of their promised tax cuts. Either that, or they would have to break manifesto commitments on no new tax rises or getting debt falling.
Summing up
Mike Brewer, Interim Chief Executive of the Resolution Foundation, said:
The Conservatives have trebled down on making employee National Insurance rate cuts the centrepiece of their manifesto. This is a stark reversal from Autumn 2022, when then Chancellor Sunak proposed raising it to 13.25% to fund social care.
Furthermore, given the weak state of the public finances, these fresh tax cuts rest on already announced tax rises, heroic efforts to reduce tax avoidance, and £33 billion of combined cuts to disability benefits and public services that will be extremely challenging to deliver. That may explain why there is scant detail.
There are big questions over whether doubling down on firm tax commitments, funded by pledges to massively cut spending in record time, really passes the plausibility test, or whether this approach answers the big economic challenge Britain faces on growth.
The unspoken issue looming over this manifesto is that it will only take a small dose of bad economic news for these plans to send a Conservative government back to the drawing board.
