Following intensive debates on structural economic stagnation, the UK government has announced a major economic package. The centrepiece of this fiscal strategy is a reduction in the basic rate of income tax from 20% to 18%. Additionally, the government has cancelled a previously scheduled increase in corporation tax, keeping the main rate at 19% instead of allowing it to rise to 25% as originally planned.
To further assist households, a temporary 1.25% National Insurance surcharge, introduced to fund social care, has been entirely repealed. Analysts estimate that while this repeal saves the poorest 10% of households around £12 a year, the wealthiest 10% will see an average benefit of over £1,650 annually.
Furthermore, the government has lifted caps on performance-related executive bonuses in the financial sector, aiming to restore competitiveness to the City of London. However, trade unions argue this decision is highly regressive, especially when public sector pay increases are being constrained to prevent wage-price spiral pressures.
This expansionary fiscal stance has triggered immediate concern from the Bank of England’s Monetary Policy Committee (MPC). To counter potential demand-pull inflation, the MPC raised the base interest rate from 1.5% to 4.5% over the course of the year. This aggressive monetary tightening has put severe strain on mortgage holders and complicates the government's fiscal targets to have national debt falling as a share of GDP within a three-year window.
The ongoing cost-of-living crisis continues to affect UK households unequally. Due to the high proportion of income spent on essential goods, inflation for the bottom decile of earners is estimated at 11%, compared to just 6.5% for the top decile. This disparity is worsened by the fact that the UK imports roughly 40% of its food. A recent 15% depreciation of sterling against the US dollar has rapidly increased the sterling price of these imported essentials.
Compounding these pressures, the government has decided to freeze the personal income tax allowance threshold. This phenomenon, known as 'fiscal drag', effectively pushes millions of low-income earners into paying tax, or into higher tax brackets, as nominal wages rise. Meanwhile, scheduled adjustments to welfare benefits are set to lag behind the actual rate of inflation, leading to a real-terms reduction in income for the most vulnerable households.
