In its New Year report, “From a Merry Christmas to a Messy New Year”, the Resolution Foundation has warned that a “New Year resolution to cut taxes (National Insurance cuts arrive on 6 January) won’t last, with April’s tax threshold rises cancelled – the net effect will be a tax cut for the top half of earners, and tax rises (or no change) for the bottom half. Overall, the richest half of Britain is likely to see incomes rise in the next financial year, but poorer households will see income falls, as targeted cost of living support comes to an end.”
In short, the lower half of earners, who are already suffering the most from the cost of living crisis, will lose any gains from next week’s lowering of national insurance payments when their income tax bills go up in April. The Resolution Foundation found that the combined effect of a cut in national insurance contributions from 6 January and a freeze on income tax thresholds – dragging more people into higher tax brackets as their salaries increase to help mitigate the effects of inflation – would only favour those earning in excess of £26,000, with the most benefit going to those earning more than £50,000 a year.
The report also pointed out that “Britain’s inflation journey, and the cost of living crisis to date, in part reflects fast-rising energy, and then food, prices. As we enter 2024, the average annual food bill will remain £1,000, and the average energy bill £760, higher than they were pre-pandemic, as Figure 1 shows. Everyone has to heat their home and put food on the table, so the core of the cost of living crisis has affected us all – though poorer households, who spend a greater share of their budgets on essentials, have been hit hardest.”
The effect of this is to blow a hole in the Tory government’s (admittedly desperate) hope that as a result of the NI cut voters would start to feel materially better off and be unwilling to risk a change to a Labour government as a result. This was already looking like desperate optimism following poll results last week showing that Labour enjoyed a massive lead over the Tories in voter’s views of which of the parties is more competent to run the economy. The polling showed that 31 per cent of voters say they trusted Kier Starmer to run the economy as against 23 per cent who trusted Rishi Sunak. The same poll showed voters preferring Starmer to Sunak as Prime Minister by 31 per cent to 19 per cent.
One suspects that in addition to being a bad year for hard-pressed workers, it’s going to be a very bad year for Sunak and the Tories.
Related post: Sunak’s end of year scorecard