A fiscal misstep

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One of the perversities of the current period of elevated inflation is that the Government is set to benefit financially. A phenomenon known as “fiscal drag” will mean more people are required to pay higher rates of tax than they did previously. That is because tax thresholds – when you begin to pay income tax at 20p, 40p and 45p, for example – do not automatically adjust with inflation. As wages struggle to keep up with price rises, eating away at households’ purchasing power, millions of people are facing a stealth tax on their earnings.

This was a problem that Boris Johnson once said he wanted to address. During the Conservative Party leadership election, he pledged to raise the threshold at which people start paying income tax at the higher rate to £80,000, ensuring that aspirational middle-income families did not find themselves facing tax rates originally intended for the wealthy.

Instead, the thresholds are being frozen. The percentage of taxpayers caught in the 40p band has roughly tripled over the past 30 years. Now, a further 1.25 million are expected to be caught in the net, according to research by the House of Commons Library that takes account of the latest inflation forecasts. This will come on top of the hit to their incomes from the increase in National Insurance contributions.

These tax rises would be less galling if the Government had shown a commitment to fiscal discipline by controlling public spending. But it has not. Instead, the public are being asked to tighten their belts, at the height of a cost of living crisis, to throw more money at unreformed public services. Is that really why people vote Tory?

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