National insurance hike will raise prices for goods and services

Committee members are concerned that the chancellor has given himself less fiscal headroom to meet his fiscal rules, compared with his predecessors. Increases in national insurance and corporation tax, together with the freezing of income tax personal allowances, will leave taxes as a share of national income at their highest in 70 years, but the committee said the scope for reducing them is limited.

The report was unanimously agreed by the cross-party committee of MPs, and explores the current tax burden, changes to the health and social care levy and the pre-briefing of Budget measures to the media. The committee held four oral evidence sessions in its inquiry, which include hearing from the Chancellor Rishi Sunak, Office for Budget Responsibility (OBR), the Treasury, leading economists (such as from the Institute for Fiscal Studies (IFS) and Resolution Foundation) and financial academics. The CIOT contributed written evidence.

In a key section of the report, the committee notes that the OBR forecast states that the policy mix chosen by the Chancellor at this Budget will act as a boost to inflation, identifying in particular the increase in employer national insurance contributions, and the large fiscal loosening that took place in the Spending Review. The Prime Minister has advocated high wage growth, too. As the OBR has shown, there may be some fiscal benefits from inflation if the source of inflation is higher domestic wages rather than from imported and domestic inflation in the price of goods. But setting out an economic policy of promoting high wage growth that is not accompanied by increases in productivity will be inflationary, and risks contributing to a ‘wage price spiral’, say the MPs. The Treasury should keep these risks at the forefront of their thinking when designing policies at future fiscal events, they said.

The committee said it already appears to be a significant challenge for the tax burden as a percentage of GDP to be lower at the end of this Parliament than at the beginning – as Sunak hopes - because the Chancellor’s tax rises have already been announced, and his fiscal headroom to reduce them and still meet his fiscal target is small. The MPs say it is understandable that total departmental spending is rising at present, and that the UK’s tax burden will rise to levels not seen during peace time, given that the country is still in a global pandemic. But not all departmental spending choices that the Chancellor made were pandemic-related. If the Chancellor wishes to be able to cut taxes later in this Parliament while still meeting his fiscal rules, he may have to identify areas of departmental spending where he can reduce spending in real terms even if this is in the face of increased demand, said the committee.

On the Budget process, the committee said the Government should wherever possible announce major changes to the rates of existing taxes and the introduction of new taxes at a Budget or other fiscal event such as a Spring Statement. This allows Parliament to consider the measures announced alongside an independent forecast by the OBR of the fiscal consequences of the measures. The committee said it was ‘highly unsatisfactory’ that for the Health and Social Care Levy the House was asked to vote without the usual distributional analysis that would be provided alongside a Budget. Additionally it was not clear to the committee why the announcements on social care were made in two distinct stages.

Also on the Health and Social Care Levy, the committee said by increasing the level of taxation through national insurance, the incidence of the levy will be on those whose income comes from wages, and on companies who employ workers. Had the Government chosen to raise the tax through income tax instead, it would have expanded the tax base to include income that individuals derive from other sources such as rental income, or pension income, as well as income from wages. The committee’s report seems sympathetic to observations from IFS that this continues a trend seen over many decades of the burden of tax being shifted towards earnings. Also they say that the creation of an entirely new tax will mean more unnecessary complexity and a simple increase in income tax would have been preferable.

The report also:

• Welcomes the reduction in the universal credit (UC) taper rate, but notes that it will be of no benefit to UC recipients who are not able to work; the Government should think carefully about how it intends to support such people, given the increases in the cost of living that are emerging.
• Expresses ‘deep concern’ that the rate of the National Living Wage (NLW) was disclosed to ITV in an ‘unauthorised fashion’ prior to the Budget, and said this could have caused confusion in the market as to whether the information was accurate.

The full 27 January 2022 report is here.

By Hamant Verma, CIOT Senior External Relations Officer