Since my previous article was published by Yorkshire Bylines, two things have happened: first, a written response from the exchequer secretary to the Treasury, James Murray MP and second, further evidence of an alarming erosion in the value of our tax-free personal allowance (PA).
This screenshot from the Bank of England’s inflation calculator shows the impact in one month from March to April on the value of our PA:
The difference of plus £187 demonstrates the increased effect of inflation between March and April of this year. The maths: £15,919-£12,570 = £3,349. £12570-£3,349 = £9,221 and that figure is what your PA is now worth, five years on from the time it was frozen.
What does this mean?
Squeeze on taxpayers
This government has claimed to be “putting more money in people’s back pockets” (See debate on 12 May on raising this allowance). But by not increasing this allowance in line with inflation, the taxpayer’s earned income has to go further. This puts an overall squeeze on household incomes and therefore what goods and services people choose to buy.
Choosing not to increase the allowance is presumably part of a government strategy aimed at controlling inflation. Many factors causing inflation are outside the government’s control. But in order to avoid contributing to an inflationary spiral, the government refuses to make inflationary adjustments to taxation.
In other words, it applies the squeeze directly on the taxpayer, an easy target. It doesn’t want to apply too demanding a tax burden on businesses (apart from raising the minimum wage, which is in itself a direct cost on businesses that has to be transferred to the consumer) because that will have an effect on overall output and demand.
Vicious cycle of inflation
All these pressures help create a vicious circle. With incomes squeezed, this curtails spending and as a result economic activity contracts. Meanwhile, this government continues to seek ways and means to increase its tax take (eg inheritance tax on farmers) and spend, using the argument ‘the previous government created the crisis and we have to fix it and to do that we need to tax more of your hard-earned income’. And by not increasing the PA, that tax take disproportionately increases its impact on those who are on low incomes.
We also have to bear in mind that the goods and services that the government then spends taxes on (health, education, welfare, defence, infrastructure, etc) are also prone to the effects of inflation, thus adding to the economic woes of the nation.
For many employees, an annual increase in salary helps keep their heads above the water, but in reality that increase may or may not be above inflation. If it is, lucky you, but all this does is create the impression that you are earning more, ie it’s not a real term increase, when the reality is you need that simply to maintain your current standard of living.
Response from exchequer secretary to the Treasury
The relevant section of the letter from James Murray MP is shown below in the fourth paragraph of his letter, where an attempt is made to address the point I raised. I find it to be particularly glib, given that he is confirming the freeze will continue at its current level until 2028, despite that £12,570 already being worth £15,919.63:
This is my analysis of his response. First, his claim to “understand the concerns” seems to be an expression of empathy, designed to win me over to his way of thinking. This doesn’t cut any ice with me.
Clearly, he should know more about the challenges the Treasury faces than a mere commoner such as myself does. Yes, I get that; we all have our different ways of looking at a problem and I do not for one moment claim to be an expert. Presumably the Treasury runs software programs capable of providing different economic scenarios, such as ‘if we tinker with that, then this is what will happen’ etc. Or is it simply a political decision as to what does or does not happen?
The earlier part of this letter is all about what the government has done (pure spin) to help pensioners. It’s not an increase they’ve had in real terms; it’s an attempt to keep pace with inflation, or a cost-of-living adjustment, and its key point is that the increase is still below the tax threshold. Again, this is political spin. It is nothing more than an adjustment for inflation, yet the letter claims this is an increase in the state pension. Be in no doubt, it is not a real-term increase which would be inflation plus.
Keeping taxes low?
And what a contradiction the next statement is: “The current government is committed to keeping people’s taxes as low as possible while ensuring fiscal responsibility.” If taxes were ‘low’, all tax bands would move in line with the cost of living, such that no-one gains (apart from through one’s own efforts) and equally importantly, no-one loses.
A prime duty of government must be to control inflation. Yet it would seem that inadequate policies continue to make matters worse, as shown by the March–April surge in inflation (see the Bank of England’s inflation calculator screenshot above).
“At our first budget, we decided not to extend the freeze on personal tax thresholds.” In reality, this means inflation erodes the value of this allowance, so ‘we are taking more of your money to pay for the mistakes of the previous government and we are not bothered really about the impact this has on poverty, mental health or even suicide’.
As the economic situation allows
My local MP, Sir Alec Shelbrooke, kindly raised and forwarded my concern about the continued need for the freeze of the PA to the Treasury. When he forwarded the response, he accompanied it with this qualifying email:
The qualified part to this response is “as the economic situation allows”. That could be now with a will, or at some unspecified time in the future, or simply never. The government never has spare cash and so borrows (and repays at inflated prices). Yet when there is a crisis or a change of direction (Covid, Brexit, housing asylum seekers, etc) the money is always there. So, it is a matter of priority, and clearly putting money in people’s back pockets right now is not a priority.
Funding the welfare state
I happened to study social policy (as well as economics) as part of my degree (graduating in 1980). At that time there was already a considerable amount of research about the impending shortfall of tax revenue to fund the welfare state into the future. That’s 45 years for elected officials, backed by a civil service, to have figured out how to address the issue effectively and remove it from its recurring presence in the headlines.
Successive governments have clearly made political capital by remaining in this self-perpetuating quagmire, with little or no significant or sustainable improvement. It’s no wonder they won’t increase this allowance in line with inflation. Our money continues to be wasted. Tax cows?
This screenshot is a poignant and distressing reminder of the impact financial hardship is having on many. It reflects the failures of successive policies by successive governments, that give rise to one of the many unintended and hidden consequences of our consumer-driven crazed society.
