The budget does little to improve living standards or facilitate sustained economic growth
Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.
The UK government’s much leaked budget statement reduces child poverty but does little to improve living standards or facilitate sustained economic growth.
The decision to scrap the two-child benefit cap is most welcome. It will lift 450,000 children out of poverty, and up to 950,000 children will be living in less deep poverty. The policy will cost £2,365m in 2026/27, rising to £3,235m in 2030/31. The policy was introduced by the Conservative government in 2017 and described by the then deputy Labour leader as “obscene and inhumane” but was enforced by the Labour government in 2024. It was so determined to enforce the cap that in July 2024 it withdrew the party whip from seven MPs for opposing it. After parliamentary rebellions, drubbings in local council elections and by-elections, the government has finally scrapped the policy. It follows the backtracking on winter fuel payments to retirees and disability benefit cuts and shows that a modicum of concessions can be squeezed by organising, protesting and campaigning.
Whilst the two child benefit cap boosts income of the less well-off, income tax rises erode it. The income tax personal allowance, the higher-rate threshold and additional-rate thresholds are frozen at £12,570, £50,270 and £125,140, respectively, until 2030/31. They were first frozen in 2021. Consequently, between 2022-23 and 2030-31, 5.2 million additional individuals are expected to pay income tax, 4.8 million more will have moved to the higher rate, and 600,000 more onto the additional rate.
Due to the extension of the frozen thresholds announced in the budget extra £24.2bn would be collected in income tax. 780,000 additional people, the poorest, will be pulled into paying income tax at the basic rate (20%) for the first time. 920,000 more would be pushed into paying income tax at the higher rate (40%). The freeze means that someone with an income of £50,000 will pay £9,512 in income tax, which is an increase of £1,247 compared to if the bands were allowed to increase in line with inflation. In 2021/22, 6.7m pensioners paid income tax, rising to 8.7m in 2025/26, and that number is expected to rise to 10m by 2030, significantly eroding the real value of state pension increases.
There is no strategy for long-term tax reform or redistribution to reduce inequalities. Instead, the government has cobbled together random changes that will enable it to maintain its arbitrary fiscal rules, and appease corporations and the rich.
People with modest savings will pay extra income tax. Currently, excluding interest on ISA accounts (which is often miserly), £1,000 a year bank interest for basic rate taxpayers and £500 for higher rate taxpayers is free of tax. Anything above that is taxed at the appropriate marginal rates. From April 2027 there will be, a 2 percentage point increase to the basic, higher and additional rates of saving income tax, increasing them to 22, 42 and 47 per cent respectively. So someone saving to buy a house or any special purchase will face extra tax.
The young in England and Wales are hit hard by frozen tax thresholds, savings tax and a new policy on student loan repayments. The Government has announced a freeze to the repayments and interest rate thresholds for Plan 2 student loan repayments (applies to those who attended university between 2012 and 2023) for three years starting from April 2027. Currently, graduates on Plan 2 loan schemes start repaying debt at earnings of £29,385. The repayment rate is 9% of salaries above the threshold. Graduates already face a marginal rate of 37% (20% income tax + 8% national insurance + 9% student loan repayments). So, if graduate wages rise with inflation, more would hit the threshold and begin making repayments. The government expects to collect around £400m a year extra from graduates.
The longer term plan appears to be to align student loan repayment thresholds with the minimum wage. Form April 2026, the minimum wage for workers aged 21 or over is to rise to £12.71 an hour, or around £24,880 a year for 37.5 hours working week. If the wage rate increases in line with anticipated inflation, the minimum wage would be around £29,000 by 2030. Scotland and most European nations do not charge university tuition fees for home students and give the young a better chance in life. England hasn’t followed suit and graduates are carrying debt of £267bn.
The government is dangling some relief by claiming that from next year the average annual energy bill would go down by £150 as green levies are removed from the bills. But they will still be paid out of general taxation i.e. cost will be borne by taxpayers. There will be no curbs on profiteering by energy companies. Energy giants have made over £125bn profits on their UK operations since 2020. Indeed, there are no windfall taxes on banks, water, phone, internet or any other companies. The Chancellor promised crackdown on welfare but was silent on corporate welfare payments frequently disguised as subsidies, grants and tax reliefs, which are rarely costed to demonstrate any economic benefits.
Just 1% of the UK population, around 685,500 Britons has wealth of $3.4 trillion (£2.8 trillion), and is hardly scratched by the budget. The wealthy may be caught by the savings tax and a mansion tax on properties worth over £2m which will yield about £400m. From April 2027, there will be a 2 percentage point increase to the basic, higher and additional rates of property income tax, increasing them to 22%, 42% and 47% respectively. This is estimated to yield £0.5 billion a year on average from 2028-29. From April 2027, there is a 2 percentage point hike and income from property for private landlords will be taxed at 22%, 42%, and 47%. This could bring in £500million a year for the Treasury per year from 2028-29. Following consultation, the government has announced plans to extend the higher Air Passenger Duty rate to private jets over 5.7 tonnes, raising £10m a year from 2027-28. These puny changes will make no difference to the wealth of the rich.
Capital gains will continue to be taxed at lower marginal rates than wages. The rates of tax on dividends above £500 will rise by 2% from April 2026. The ordinary rate will rise from 8.75% to 10.75%, and the upper rate will increase from 33.75% to 35.75%. The additional rate, applicable to the ultra rich will remain at 39.35%. The government hopes to raise £1.2 billion a year from the changes. In contrast, wages are taxed at marginal rates on 20%-45%. Wage earners pay national insurance, beneficiaries of capital gains and dividends don’t. The differential treatment will encourage tax avoidance strategies.
The government’s indulgence of the finance industry continues. The state acts as a lender of the last resort to banks and bails them out. It guarantees safety of £120,000 of bank deposits and send new customers to banks by insisting that benefits and pension are paid through bank accounts. It handed £895bn of quantitative easing to them. The banks have made over £45.9bn in profits but there will be no windfall tax. Since 2023, the European Union mostly stopped paying interest on central reserves to banks. The budget didn’t herald the end of this disguised subsidy. The government will continue to hand £23bn a year to banks through interest payment on central reserves. The budget extends the role of Private Finance Initiative (PFI) in infrastructure and the NHS, and will generate vast profits for corporations. On average, the government repays £6 for every £1 of private investment. Money buys less.
Sustained economic growth has been the mantra of governments but the budget will not secure it. The OBR expects the economy to grow by 1.5% this year, which is lower than the March 2025 forecast of 1.9%. The rate of productivity is now forecast to rise by around 1% until 2030, compared to the previous forecast of 1.3%. The stagnation will continue as the masses don’t have the purchasing power to buy goods and services. After the budget measures, the average disposable income is expected to rise by just 0.5% a year.
Low growth and productivity are the consequence of low investment. The UK is a laggard because successive governments have abandoned direct investment by the state in infrastructure and new industries. Unsurprisingly, the UK lags behind other nations in making investment in productive assets. It invests 18.2% of its GDP in productive assets, compared to 26% for France, 25% for Germany, 23% average for OECD countries, 40.4% for China and 30.5% for India. Yet there is no UK plan to bridge the investment gap. There are no plans to reform the City of London, curtail the power of shareholders to extract excessive returns, revive manufacturing, secure equitable distribution of income and wealth, bring essential industries into public ownership or democratise industry to ensure that the economy works for all stakeholders.
Seemingly, governments are content to manage decline. A new direction is needed.
Image credit: Simon Dawson / Number 10 – Creative Commons
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