“Stealthy” freezes to tax and welfare thresholds will outweigh any benefits people will get from the government’s plan to cut taxes, according to economists.
Chancellor Kwasi Kwarteng announced a raft of measures in his mini-budget last month, including cutting the basic rate of income tax by 1p and reversing the increase to National Insurance, brought in earlier this year to pay for health and social care.
But the Institute for Fiscal Studies said the ongoing four-year pause on raising the amount people earn before they pay tax, as well as long term freezes on when people move to higher tax brackets, meant the government was “giving with one hand and taking with the other”.
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The group also warned a nine-year freeze on when the taper kicks in for child benefit was hitting households amid the cost of living crisis.
The IFS concluded that by 2025-26, the freezes will take away £2 for every £1 given to households through the personal tax cuts outlined by the government.
Tom Waters, a senior research economist at the IFS, said: “Practically every part of the tax and benefit system contains allowances, amounts or thresholds that are frozen, often indefinitely.
“Some are farcical – the Christmas bonus, paid to pensioners and disability benefit recipients, has been frozen at £10 since 1977, in which time prices have more than quintupled.”
One of the group’s research economists, Tom Wernham, said the freezes were “set to drag millions more into the tax system and into higher rates of tax”.
He added: “Giving with one hand and taking with the other in this way is opaque and stealthy – and when inflation is volatile the impact can vary hugely from what the government initially intended.”
Alex Beer, welfare programme head at the Nuffield Foundation, supported the findings of the report, and said there was a real human cost to the freezes.
She said the threshold freeze on the benefit cap “dramatically increases the numbers of families subject to the cap and reduces the amount of real support the benefit system offers”.
She added: “Evidence shows that parents currently subject to the cap struggle to meet their children’s basic needs, and that it increases maternal mental ill-health and risks affecting children’s emotional and physical development.”
A Treasury spokesperson said: “This government is committed to a high growth and low tax economy and helping people to keep more of their hard-earned money is a key priority, as seen by our commitments to cancel the rise in national insurance and reduce the basic rate of income tax.
“The income tax system is highly progressive. This year, the top 50% of income taxpayers are expected to pay around 92% of total income tax while the bottom 25% are expected to pay just 2%.”
But Labour MP and shadow economic secretary to the Treasury, Tulip Siddiq, said: “The Tories’ failed trickle-down economics is hitting people’s pockets.
“Liz Truss must reverse her government’s disastrous budget now.”