UK Chancellor of the Exchequer Jeremy Hunt unveiled tax cuts on Wednesday to boost a sluggish economy as growth forecasts for next two years were sharply cut.
In the autumn statement, the chancellor announced that national insurance employees pay on their earnings will be cut from 12 percent to 10 percent from January and this is set to help 27 million working people.
The insurance cut translates to GBP 450 savings to someone on the average salary of GBP 35,000, the chancellor said.
“If we want people to get up early in the morning, if we want people to work nights, if we want an economy where people go the extra mile and work hard then we need to recognise that their hard work benefits all of us,” Hunt said.
The Office for Budget Responsibility forecast headline inflation to ease to 2.8 percent by the end of next year, before falling to the 2 percent target in 2025, which a year later than forecast in March.
On the international level, the war in Ukraine and the Middle East conflict, and wage growth on the domestic front pose upside risks to the inflation outlook, the OBR said.
The UK economy is projected to expand 0.6 percent this year versus a 0.2 percent contraction forecast in March.
However, the OBR sharply revised down the growth projection for next year to 0.7 percent from March’s forecast of 1.8 percent. The OBR attributed sluggish growth to weak real wage growth, the effect of past increases in interest rates and fading fiscal support.
“It is plausible that only around half the impact of the past substantial rise in interest rates has yet fed through to the economy, with the rising share of fixed rate mortgages in recent years slowing the pass-through from mortgage rates to household disposable incomes,” the OBR said.
The GDP growth outlook for 2025 was also slashed to 1.4 percent from 2.5 percent.
In measures to boost investment, Chancellor Hunt made “full expensing” permanent and described it as “the largest business tax cut in modern British history”.
The move is expected to raise annual investment by around GBP 3 billion a year and a total of GBP 14 billion over the forecast period, according to the OBR.
Full expensing, which was first announced in the spring budget this year, offers 100 percent first-year relief to companies on qualifying new main rate plant and machinery investments from April 2023 until March 2026.
The benefit allows companies to write off the cost of investment in one go and business can get up to 25 pence cut in corporation tax for every pound invested.
Hunt also announced a freeze on alcohol duty until August next year, while the duty on hand-rolling tobacco was raised by 10 percent.
The OBR forecast government borrowing to fall from 4.5 percent of GDP in 2023-24, to 3.0 percent next fiscal. Thereafter, it is projected to ease further and eventually reach 1.1 percent in 2028-29.
“That means we also meet our second fiscal rule – that public sector borrowing must be below 3 percent of GDP – not just by the final year, but in almost every year of the forecast,” Hunt said.
Headline debt is projected to be 94 percent of GDP by the end of the forecast.
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