The next Prime Minister will have the financial headroom to unlock £60bn of tax cuts for struggling households and businesses as surging inflation floods the state’s coffers with cash, top economists predict.
Soaring prices combined with the former chancellor Rishi Sunak’s freezes to income tax thresholds have meant workers will pay far more additional tax than had previously been expected, according to the Centre for Economics and Business Research (Cebr).
Higher inflation means a bigger economy in cash terms, handing the Treasury an extra £133bn per year by 2024-25, Cebr’s analysts have predicted.
Just over half of this will be swallowed up by extra spending, as payments such as the state pension rise at least in line with prices, while one-quarter of the national debt is tied to inflation.
But it still leaves £60bn per year of extra cash which the next Prime Minister could choose to let families and businesses keep for themselves with tax cuts, said Douglas McWilliams at the Cebr. This comes on top of the roughly £30bn of headroom that the Government already has when it comes to meeting its borrowing targets by the middle of the decade, according to official forecasts from the time of March’s spring statement.
Mr McWilliams said: “People are paying higher taxes and the question is, will the Government give them their money back or will they blow it on something else?
“The biggest single element of it is the impact of the freezing of allowances. Arguably you shouldn’t be freezing allowances at all and you particularly shouldn’t be freezing them at a time of high inflation.”
It comes at a time when tax raids put the Government on track to rake in taxes amounting to 36.3pc of GDP, the highest share since the 1940s.
The next Prime Minister will be under pressure to ease the cost of living crisis for families and businesses with inflation running at a 40-year high of 9.1pc as the cost of food and energy soars.