In her latest budget statement, Labour’s Shadow Chancellor Rachel Reeves announced a three-year freeze on income tax and national insurance thresholds. Experts recently cautioned that such a decision would be most damaging to low-income households. This policy shift would open up tax liabilities for more than 1.7 million employees. People with incomes under £35,000 will be hit the hardest as they will be more likely to be forced into higher tax bands.
Reeves learned not to ignore the real people working behind the decision. He continued to defend it against widespread criticism as a key strategy to increase revenues by an estimated £12.4 billion by fiscal year 2030-31. Critics contend that a modest increase in income tax rates would have raised the same amount. They think that would prevent the need to add additional burden to low-income earners.
The Resolution Foundation has been among the most eloquent in their condemnation of the threshold freeze. They claim that there will be an excessive financial burden placed on households, no matter their income level. Ruth Curtice, chief executive of the Foundation, said making the tax 1p higher would have been more cost effective. She made clear that her bill would have been equally as successful at raising money. She reiterated how the manifesto tax pledge has especially hurt working people. This was in response to Reeves’ previous proposals of increasing tax rates, which he subsequently dismissed in favor of a freeze.
The freeze’s effect is expected to be devastating. Curtice warns that just extending the income tax threshold freeze to 2030 will disproportionately impact people in the bottom half of the income distribution. The National Institute of Economic and Social Research echoed this concern. Be it business or environmental community, they all argued that freezing thresholds instead of raising rates would hurt nearly everyone, excluding the top 10% of earners.
The budget specifies cuts to departments across the board amounting to £6.4 billion. Funding for health, defense and education remains untouchable. This would signal a return to austerity measures that largely defined previous economic recessions. Curtice notes that these cuts would be equivalent to an astronomical 88% of the average annual cut during the austerity years. Specifically, this stretch extends from 2009-10 to 2018-19.
Reeves had already suggested she was willing to break with Labour’s manifesto promise not to raise taxes. She is still looking at a plan from the Resolution Foundation for a 2p increase in income tax to be offset by a 2p decrease in national insurance. This new approach would only have seen high earners above £50,000 made worse off financially. In the end, she chose the less controversial and safer approach of freezing thresholds.
New analysis from the Resolution Foundation uncovers an even more ironic twist. Her adherence to her no tax rises manifesto has in fact hurt millions of low-to-middle earners, who would have been better off with increasing tax rates rather than frozen thresholds. Critics argue that the freeze is indicative of a broader trend towards a “high-tax, high-debt steady state in a world of low productivity growth and higher interest rates,” as described by experts at the Foundation.