Blowing the Budget – Chancellor delivers ‘Southern Comfort’ statement with households in London and South East gaining three times as much as those in the North from tax cuts next year

Chancellor delivers ‘southern comfort’ statement with households in London and South East gaining three times as much as those in the North from tax cuts next year, say think-tank Resolution Foundation

The Chancellor’s huge package of personal tax cuts confirmed yesterday will disproportionately benefit London and the South East – with households in these regions standing to gain to three times as much on average (£1,600) as those living in Wales, the North East and Yorkshire (£500) next year – according to the Resolution Foundation’s overnight analysis of the September 2022 fiscal statement.

Other key findings from the report Blowing the budget include:

• The new squeezed middle. Middle income Britain stands to lose most from the overall impact of all tax and benefit policies announced over the parliament. The poorest fifth of households gain £90 on average, with the middle fifth losing £780, and only the top five per cent gaining significantly (£2,520).
• Rising incomes at the very top. The scale of tax cuts for the richest five per cent is enough for their incomes to grow by two per cent next year (2023-24). However, the other 95 per cent of the population will get poorer as the cost-of-living crisis continues.
• 2.3 million people fall below poverty line. Between 2021-22 and 2023-24, the number of people living in absolute poverty is on track to rise by 2.3 million, including 700,000 children.
• R.I.P. Fiscal conservatism. Borrowing is on course to settle in at 3.4 per cent of GDP in the medium-term. That is 0.7 percentage points higher than the average level under the last Labour government (1997 to 2010).
• Tax cuts are not self-funding. The £45 billion of tax cuts announced yesterday would need to increase GDP by 4 per cent over the long-term in order to be self-funding – an implausibly large boost for measures that are more likely to have a marginal long-run effect on GDP.
• Osborne-sized spending cuts ahead?  While the Chancellor said that debt falling remains his key metric for fiscal sustainability, he did not outline how that would be achieved. Doing so during the middle of this decade would require spending cuts of £35 billion in 2026-27, assuming tax rises have been ruled out. This would be broadly equivalent to the total cut to public spending announced by George Osborne in his 2010 Budget.

The Chancellor decided to blow the budget in his first fiscal statement, bringing forward a £45 billion package of tax cuts, the biggest for 50 years. In doing so, he rejected not just Treasury orthodoxy but also the legacy of the previous Conservative administrations, as a wholly new approach to economic policy was unveiled.

In this briefing note, Resolution Foundation analyse the details of the statement and show that today’s Government is no longer fiscally conservative or courting the Red Wall. Instead, debt is on course to rise in each and every year of the forecast period, and the focus has shifted to the South of England where the beneficiaries of these tax cuts are more likely to be living.

Key findings

• The tax cuts confirmed in the fiscal statement are strongly focused on higher-income households, driven by the reversal of the rise in National Insurance Contributions, the scrapping of the 45p rate of Income Tax, and associated Dividend Tax cuts. Next year they will see someone earning £200,000 gain £5,220 a year, rising to £55,220 for a £1 million earner. Those on £20,000 will gain just £157.
• Those living in the South East or London will see over three-times (on average, £1,600) the gains of those in the North East, Wales or and Yorkshire (an average of £500)
• The South is also where the main impact of a welcome cut to stamp duty will be felt: the tax bill on the sale of the average first-time buyer home in London will fall by £6,300, compared to no gain for the average first-time buyer in the North East.
• The Government’s focus on trying to fix the UK’s lamentable growth performance is clearly the right one. However, putting all its eggs in the low-tax basket is high risk given limited evidence that tax changes like those announced at the fiscal statement make a significant difference to growth rates.
• We estimate that energy support and the weaker economic outlook will increase borrowing by £265 billion over the next five years compared to the Office for Budget Responsibility’s March forecast. Tax cuts cumulatively will cost £146 billion over the same period and raise borrowing to £411 billion.
• The Chancellor confirmed that debt falling remains his key metric for fiscal sustainability. To achieve this by the middle of this decade would require spending cuts of £36 billion in 2026-27, assuming tax rises have been ruled out. This would be broadly equivalent to the total cut to public spending announced by George Osborne in his 2010 Budget.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“Yesterday the Chancellor decided to blow the budget on a £45 billion package of tax cuts. In doing so he rejected not just Treasury orthodoxy but also the legacy of Boris Johnson as a wholly new approach to economic policy was unveiled.

“Today’s Conservative Party is no longer fiscally conservative or courting the Red Wall, with debt on course to rise in each and every year, and its focus shifting South where the main beneficiaries of these tax cuts live.

“The backdrop to yesterday’s fiscal statement was an ongoing cost-of-living crisis that will mean virtually all households getting poorer next year as Britain grapples with high inflation and rising interest rates. But while the measures announced won’t prevent more than two million people falling below the poverty line, they will mean only the very richest households in Britain seeing their incomes grow.

“The Chancellor’s package of measures is likely to boost growth in the short-term. But it will require a large dose of economic good fortune, such as the rapid fall in gas prices that is beyond the government’s control, to make his growth gamble fully pay off. Should strong growth fail to materialise, and tax rises be ruled out, then Osborne-esque spending cuts would be needed to achieve the Chancellor’s fiscal rules.”