Amid lackluster prospects for economic growth, the British government announced it would cut taxes for workers ahead of a general election this year.
Jeremy Hunt, Britain’s top financial official, told lawmakers on Wednesday that he would cut National Insurance, a payroll tax paid by workers and employers that funds state pensions and some benefits, by two percentage points. It would take the rate for about 27 million employees down to 8 percent, and follows a two percentage point cut announced less than four months ago. Together, the cuts would save the average employee about 900 pounds ($1,145) a year, Mr. Hunt said. The rate was also cut for self-employed workers.
“We can now help families not just with temporary cost-of-living support but with permanent cuts in taxation,” Mr. Hunt, the chancellor of the Exchequer, said in Parliament. “We do this to give much needed help in challenging times. But also because Conservatives know lower tax means higher growth.”
Mr. Hunt also announced a sweep of smaller measures, including freezing taxes on alcohol and fuel, proposals to increase productivity in the public sector, and abolishing the tax advantages for foreign earnings of British residents living abroad.
The chancellor has been under political pressure from the governing Conservative Party to lower taxes ahead of the general election, which is expected to take place this year, though a date has not been set yet. The party is substantially lagging the opposition Labour Party in the polls.
But Mr. Hunt’s ability to offer sweeteners to voters has been constrained by the fact that the British economy is growing slowly — if at all. Stretched public services need money and there are calls to invest more in infrastructure. The chancellor also has to meet his self-imposed budget rules, which gave him even less fiscal room to maneuver.
By cutting some taxes, the Conservative Party is hoping to shift the narrative that the end of their 14 years running the government has been dominated by tax increases. But because of freezes relating to income tax and other measures, the tax burden, measured by tax receipts as a percentage of gross domestic product, is set to rise to the highest since the Second World War. Reducing income tax, a more broad-based tax, was reportedly ruled out over concerns about the cost of such a giveaway and the risk it would increase inflation.
Still, there is a sense among economists and other analysts that this budget will hamstring the next government — presumably led by Labour if the polls bear out — by providing tax cuts today and leaving less money available for many government departments after the election.
The Conservative Party is battling for its electoral future against an unforgiving economic backdrop. Though inflation has come down from double-digit highs to 4 percent, the Bank of England is wary of cutting interest rates too soon. Meanwhile, businesses are failing at a rapid clip and voters say they want measures to help ease the high cost of living.
The British economy ended last year in a recession. This year, it is expected to grow 0.8 percent and then 1.9 percent in 2025, according to the Office for Budget Responsibility, an independent fiscal watchdog.
“Because we have turned the corner on inflation, we will soon turn the corner on growth,” Mr. Hunt said.
Budgets across Europe are under strain as economies feel the pinch of higher interest rates and the need to spend more on defense and invest more aggressively in the green transition. At the same time, officials are trying to bring down debt levels after spending heavily throughout the pandemic and supporting households through an energy crisis after Russia’s invasion of Ukraine led to the shut down of a key source of natural gas. Last month, the French government announced 10 billion euros ($10.9 billion) in spending cuts.
On Wednesday, Mr. Hunt said he would keep the growth in day-to-day spending at 1 percent, adjusted for inflation, over the next five years. And rather than increase those budgets by more, the money would be spent “better,” he said, listing proposals to use technology, including artificial intelligence, to increase productivity in health, policing and the courts.
The British government has previously said it would keep spending on defense constant as a share of national income. Mr. Hunt has outlined a big increase in child care funding, money for the National Health Service and a pledge to keep spending on schools flat after adjusting for inflation. That leaves other government departments, such as the courts, prisons and local government, facing potentially steep cuts. High inflation has also eroded the power of earlier spending plans.
This puts the next government in a tight spot. To keep the tax cuts and maintain pre-existing spending commitments, the next government would need to allow these other spending cuts to go ahead, despite voters calling for more investment in public services. Or, the next government would need to raise taxes, something neither main political party wants to suggest before an election.
But the outlook can change. If the economy grows more strongly or productivity increases, the public finances could turn more favorable. To promote this, Mr. Hunt emphasized that his plans, including the cut to National Insurance, would encourage people back into work. There are 700,000 more people reported as economically inactive than before the pandemic.
Some of the tax cuts will be financed by a change in the tax treatment of foreign incomes for so-called non-domiciled residents, people whose permanent home is outside of Britain. It would raise £2.7 billion a year by 2029, Mr. Hunt said.
The change creates a challenge for the Labour Party, which had planned to revoke the status of “non-doms” in order to raise money to fund some of their election pledges, such as recruitment of N.H.S. staff and an expanded school breakfast service.
Altering the non-dom rules raises “money the party opposite planned to use for spending increases,” Mr. Hunt said. “But today a Conservative government makes a different choice. We use that revenue to help cut taxes on working families.”