What Sunak’s promised tax cuts really mean

The politics of tax cuts used to be simple. The Tories promised to cut the basic rate of income tax, and to defend the 40p higher rate introduced by Margaret Thatcher and Nigel Lawson from any increase. And upon that foundation they campaigned, fairly successfully, as the low tax party, so much so that a cardinal feature of Blairism was to guarantee no increase in either the basic rate or the higher rate of income tax.

Of course, there are hundreds of other taxes that affect people and businesses, and many of these went up under Tory governments past and present. But the litmus test of tax was income tax, and political attention focused almost entirely on the headlines rates.

Rishi Sunak is testing this campaign strategy to absolute destruction. Any cuts he makes to the headline basic rate, this week and next year, are in the context of other tax increases so large that they can’t possibly be disguised. And that includes huge increases in income tax payments.

These result from the stealth tax of freezing income tax thresholds (including the personal allowance of £12,570) in cash terms for six years from 2021, a period of high inflation; and the reduction last year of the additional 45p rate threshold from £150k to £125k, where it has also been frozen.

The additional rate, introduced by Gordon Brown after the financial crash, was itself a massive breach of the Lawson 40p “top” rate. Intended as a tax on just the British super rich, the Tories were forced to keep it after 2010—first by the coalition with the Lib Dems, and then by their inability to budget without it. The rate came down from 50p to 45p, but because the threshold to pay it was first frozen at £150k, and then sharply reduced, it will this year hit nearly half a million taxpayers.

It was Liz Truss’s attempt in her mini-budget last year to go “full Thatcher” and abolish the additional rate altogether that spooked the financial markets, because of its impact on government borrowing. It was quickly reinstated.

According to the Office for Budget Responsibility, these “stealth” income tax increases alone are equivalent to £29.3bn a year, or a 4p increase in the basic rate of income tax.

Then there are the year-by-year increases in council tax (an average of 5.1 per cent this year alone), alcohol duty (10.1 per cent this year), and a host of others. Put all this together and UK households are facing an average tax rise of £3,500 a year between the 2019 election and next year, according to the Institute for Fiscal Studies. The IFS estimates that the overall tax increase since 2019 and 2024 is equivalent to £100bn a year—increasing the total tax take to 37 per cent of national income in 2024, up from about 33 per cent four years previously.

Labour will probably repeat the Blair strategy of committing to maintaining whatever headline income tax rates it inherits next year. But just as the Tory brand has been trashed by the scale of its stealth income tax increases, so too has the current government given considerable flexibility to Keir Starmer and Rachel Reeves to increase taxes—particularly on the better off—by the same means.

Both Sunak and Starmer face two huge spending pressures. The first is government debt interest, which has escalated in line with massive increases in government borrowing, especially since Covid. And the second is the parlous state of the NHS.

After a year of total failure to reduce hospital waiting lists, Sunak seems to have given up on the NHS. He hasn’t even yet resolved the pay dispute leading to ongoing strikes by doctors and consultants.

If it wins next year, Labour will therefore take over an NHS in deep crisis. And resolving it will require a large increase in spending. The only question is when it comes.

So ignore all Thatcherite language on income tax. And any tokenistic announcements about cuts. The reality is big increases, and the polls show that the public is no longer fooled.