The recently announced £40bn in tax rises is set to more than fulfil the £22bn “black hole”, said to have been unearthed by British chancellor Rachel Reeves. Despite a clear discretionary outlay, this surplus of funds available to the government raised by increased tax revenue will grant greater expansionary power to the government, with spending set to rise on public services, as well as providing fiscal headroom in case of crisis.
Unchanged Corporation Tax Rates
Various studies over the past decade have concluded corporation tax cuts would stimulate long-term economic growth, including that of The University of Oxford. Rates up to 25% are said to deter investment from firms, hence, if lowered, increased investment can encourage businesses to expand and further research and development channels, leading to innovation. Furthermore, when reverting to a simple aggregate demand/supply model, we can infer greater investment will lead to further job creation, via the firms’ expansion, adding to the tax base of the UK government, while reducing the burden of welfare payments.
A benefit for the consumer could be lower prices, as some companies may pass on tax savings to consumers through reduced prices of goods and services, improving overall purchasing power. However, the decision to retain the 25% rate may have been taken due to the current state of the British economy, as reductions here may have required tax rises elsewhere, hence maybe we could see lowered corporation tax rates in a future budget.
Long-Run Optimism?
One of the expansionary measures announced during the budget was that the government would extend HS2 funding to cover the tunnelling process between the originally announced terminus Old Oak Common and London Euston station. I believe this to be a great decision from Reeves, as an intercity train failing to reach the centre of the capital would’ve undoubtedly resulted in reduced passenger numbers compared to the updated plans. This increased outlay will provide further employment, although the service improvements may only bring it up to the standard of what the British public would always have been expecting.
However, this increased funding from the government will also rely on the private sector to invest heavily as major improvement works must be carried out in Euston station, in order to accommodate HS2 trains and an increased service capacity, which isn’t covered by the government.
Future Benefits for the Taxpayer?
It was also decided during the autumn budget that tax bands would not remain frozen beyond 2028, a policy previously set out by the conservative government. It is understood this decision was taken due to the likely outcome of too many British taxpayers being dragged into higher bands, assuming wages rise with inflation. This is a positive move from the Labour government, however, a lot can change in 4 years but hopefully, they stick to the plan.
