A potential abolition of national insurance for workers would not come for years
Chancellor Jeremy Hunt has indicated it is his long-term ambition to end ‘double tax on work’.
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Your support makes all the difference.Labour has repeatedly said that Prime Minister Rishi Sunak is planning a £46 billion “unfunded” tax cut, comparing that with the £45 billion of “unfunded” tax cuts which Liz Truss’s government announced.
At Prime Minister’s Questions on April 17, 2024, Labour leader Keir Starmer said: “When is he (Mr Sunak) finally going to learn the lesson from his predecessor’s mistakes and explain where the money is coming from for his own completely unfunded £46 billion promise to scrap national insurance?”
Evaluation: Missing context
Mr Sunak’s Chancellor Jeremy Hunt has indicated that the Conservative Party wants to abolish the part of national insurance that workers pay, but has been clear that it is a long-term ambition.
Mr Sunak and Mr Hunt have not made a firm policy pledge, nor have they identified how it would be paid for.
Labour has yet to receive an answer after asking the Government several times to explain how it might fund an abolition of national insurance payments for workers.
The facts
Where does the claim that Ms Truss planned £45 billion of tax cuts come from?
The plan put forward by Liz Truss’s chancellor Kwasi Kwarteng in September 2022 was officially called The Growth Plan. In the media it was widely referred to as the mini-budget.
The decisions on tax policy announced in The Growth Plan were estimated to in total cost the Government £44.8 billion in the 2026-27 financial year.
This is the basis of Labour’s claim that Ms Truss announced £45 billion in tax cuts.
Where does the claim that Mr Sunak plans £46 billion of tax cuts come from?
This is an estimate calculated by Labour of how much it could cost to abolish national insurance contributions (NIC) from employees and the self-employed.
The Labour Party said that it could cost £39.96 billion to reduce employee NIC from 8p to 0p in the pound in the 2028/29 financial year.
It said that reducing self-employed NIC from 6p to 0p could cost £2.28 billion. Meanwhile, taking both the self-employed and employee NIC additional rate from 2p to 0p could cost £0.54 billion and £2.90 billion respectively.
Together that adds up to £45.68 billion.
Paul Johnson, the director of the independent Institute for Fiscal Studies (IFS) think tank, has said it would cost “more than £40 billion” to abolish national insurance for employees.
What are national insurance contributions?
National insurance is a tax on people’s earnings. It comes out of your pay packet if you’re an employee, but employers also pay national insurance contributions on top of that.
There is “no special link” between how much people pay in national insurance and the benefits they get, according to the IFS.
In the past if you paid more in national insurance over your career you would get a larger state pension. That is no longer true, although people do need to have made 35 years of contributions to get the full state pension.
The income the Government gets from national insurance does not dictate how much is spent on the NHS or benefits.
It is the part that employees and the self-employed pay that the Government hopes to abolish one day.
The Government has recently reduced national insurance payments for workers from 12% to 8%.
What does it mean if critics call a Government plan “unfunded”?
If a Chancellor announces something which costs the Treasury money – such as a tax cut or a rise in spending – he or she can announce a way to raise money or save money in some other way to cover that cost.
If the Chancellor does not do that their critics can say their plans are “unfunded”.
In practice this means is that the Government will borrow to fund their plans.
Were Liz Truss’s tax cuts “unfunded”?
The idea that Ms Truss’s plan was “unfunded” was regularly repeated after The Growth Plan was announced.
This is because she presented several policy decisions which when combined would cost £44.8 billion by 2026/27 while not balancing these by announcing any corresponding spending cuts or other ways of raising money.
At the time the Resolution Foundation think tank labelled Ms Truss’s plans “unfunded tax cuts”. The Institute for Fiscal Studies did not use the word “unfunded” but Mr Johnson said it was “the biggest package of tax cuts in 50 years without even a semblance of an effort to make the public finance numbers add up”.
Ms Truss herself argued in a speech at the Institute for Government in September 2023 that cutting the higher rate of income tax and the tourist tax “would have increased, rather than decreased, revenues within five years”.
She added: “So when people describe my policies as unfunded tax cuts, that is not an accurate description, in fact quite the opposite of being unfunded, these tax cuts could have increased funding for our public services.”
The Growth Plan similarly argued that it “aims to raise GDP growth over the medium-term, doing so would raise living standards and increase the size of the tax base.”
Ms Truss resigned in October 2022 after the fallout from The Growth Plan, becoming the country’s shortest-serving prime minister after just 49 days in office. None of her tax plans were introduced.
Is Rishi Sunak planning unfunded tax cuts?
When giving evidence to the Treasury Select Committee on March 13, days after the Spring Budget, Chancellor Jeremy Hunt said the Conservative Party wants “to abolish the double tax on work”.
This was a reference to the fact workers pay both national insurance contributions and income tax.
But Mr Hunt said that is a “long-term ambition” and “won’t happen in one parliament”.
He added: “Ultimately, if we abolish the double tax on work, as the Conservative Party wants to do over time – it won’t happen in one parliament; it is a long-term ambition – it will be the biggest tax simplification in our lifetimes.”
The abolition of national insurance contributions are therefore future hopes, rather than policy announced in a budget. Ms Truss and Mr Kwarteng’s tax cuts were actual policy.
Torsten Bell, the chief executive of the Resolution Foundation think tank, said in March: “The Government really aren’t doing a Liz Truss. Saying you’d like to cut taxes more in future might be wishful thinking but it isn’t the same thing as announcing massive tax cuts with no idea how to pay for them.”
Where has Mr Sunak said he will get the money from?
At Prime Minister’s Questions on April 17, Mr Sunak was repeatedly asked by Sir Keir how he would fund any potential scrapping of national insurance. Mr Sunak did not answer.
Links
X post 1 from Labour (archived post and video)
Instagram post from Keir Starmer and Labour (archived)
X post 2 from Labour (archived)
PMQs – April 17, 2024 (archived)
The Growth Plan 2022 (archived)
Labour – Tory threat to the state pension (archived)
IFS – Spring Budget 2024 (archived)
IFS – What are National Insurance Contributions? (archived)
National Insurance Contributions (Reduction in Rates) (No.2) Bill 2023-24 (archived)
Resolution Foundation – Economic turmoil matters for family finances as well as financial markets (archived)
IFS – Mini-Budget response (archived)
Liz Truss speech at IfG (archived)
Treasury Committee – Oral Evidence: Budget 2024 (archived)
X post by Torsten Bell (archived)