Business
Higher taxes look to be here to stay
The UK has entered a “new era” of higher taxes, the Institute for Fiscal Studies (IFS) think tank has said.
Its director Paul Johnson said that middle earners were “set for a shock” with taxes going up and prices soaring.
In his Autumn Statement, the chancellor announced plans to increase taxes to shore up the public finances and to provide help with energy bills.
The toughest decisions on spending cuts had been delayed until after 2024, the IFS said in its analysis of the plans.
On Friday, Chancellor Jeremy Hunt acknowledged there were “very difficult times ahead” but said his plans gave people “certainty” on how the government would help them through the recession.
But the IFS’s Mr Johnson warned that living standards were facing the “biggest fall in living memory” due to weak economic growth, an ageing population and high levels of government borrowing in the past.
“The truth is we just got a lot poorer. We are in for a long, hard, unpleasant journey; a journey that has been made more arduous than it might have been by a series of economic own goals,” Mr Johnson said.
On Thursday, the government’s independent forecaster, the Office for Budget Responsibility, said the UK was in a recession and forecast that the economy would shrink next year.
Mr Johnson described the economic backdrop as “grim”, and said the tax burden was unlikely to return to its pre-pandemic average “for several decades”.
In total, the plans announced on Thursday amount to about £25bn in tax rises. The measures include:
- Tax thresholds being frozen until April 2028, meaning millions will pay more tax
- The top 45% additional rate of income tax starting for people earning over £125,140, instead of £150,000
- Local councils in England being allowed to raise council tax by 5% a year without a local vote, instead of 3% currently
Mr Johnson said people on middle incomes would be hardest hit, because they would not benefit from targeted government support.
“Their wages are falling and their taxes are rising. Middle England is set for a shock,” he said.
According to the think tank’s analysis, households will pay energy bills that are £900 a year higher than they are now – after the energy price cap rises in April and without this year’s £400 rebate.
Daniel Cooke, a father of three, told the BBC he won’t qualify for extra help, but he has already had to take on a second job delivering takeaways in the evenings to make ends meet.
“We’ve been able to almost survive with the assistance that’s come through from the government… [it’s now] going to be taken away from us through almost no fault of our own.
“It’s a very frightening, very worrying time for us as a young family. How we’re going to pay for our bills, how we’re going to pay for our gas and electric – I have no idea.”
In the Autumn Statement, the chancellor announced he was extending the freezing of tax thresholds for a further two years up to 2028. That means the threshold where you start paying tax is fixed, rather than rising with inflation. So people will pay a higher proportion of their earnings in tax as their wages go up.
While taxes will rise from April, almost all spending cuts will be delayed until after 2024, when the next general election is expected, a move which drew criticism from some parts of the Conservative Party.
Former business secretary Jacob Rees-Mogg urged the chancellor to look at further government spending cuts “before reaching for the easy options of putting up taxes”.
But Mr Hunt defended his plans, telling the BBC’s Today programme: “Sound money matters more than low taxes.”
He also denied that the announcements constituted a “raid on working people”, and suggested that it was not possible to raise £25bn “just focusing on a very small group of very rich people”.
As well as tax rises for people on average incomes, he said his plan involves “looking after the most vulnerable”, pointing towards new targeted payments for pensioners, people on means-tested benefits and people who claim disability benefits to help with rising bills.
The Autumn Statement was also praised by the International Monetary Fund (IMF) for balancing the need to bring prices down and protect people’s earnings during a difficult time for the economy.
“We welcome the government’s efforts to better protect the vulnerable and to prioritise education, health, and investment,” the IMF said, which was in stark contrast to the criticism it offered Kwasi Kwarteng in the wake of September’s mini-budget.
But shadow chancellor Rachel Reeves said the government could have made “fairer choices” around tax.
“We need a serious plan to grow our economy,” she told BBC Breakfast, criticising the government’s decision to reduce the tax surcharge on banks, and its failure to introduce a non-dom tax status or to tax private equity bonuses.
“If [the government] did some of those things, [it] wouldn’t have needed to increase taxes on ordinary people. This government comes time and again for the pockets of the ordinary man and woman rather than for those with the broader shoulders,” she added.
The IFS analysis also found that ordinary households will be 30% worse off by 2028 than they would have been had incomes continued to grow as they did before the 2008 financial crisis.
Its findings chimed with those of the Resolution Foundation, a think tank that focuses on people on lower incomes.
The Resolution Foundation said that the chancellor’s economic plans would add more pressure on the “squeezed middle”, who face a permanent 3.7% hit to their incomes, which is bigger than the very richest.
It added that it thought the spending cuts outlined on Thursday were likely to be “undeliverable” as they would require “years of holding down public sector wages below those in the private sector”.
Reports /TrainViral/
The prospective new owner of Royal Mail has said he will not walk away from the requirement to deliver letters throughout the UK six days a week, as long as he is running the service.
“As long as I’m alive, I completely exclude this,” Czech billionaire Daniel Kretinsky told the BBC.
Mr Kretinsky has had a £3.6bn offer for Royal Mail accepted by its board.
Shareholders are expected to approve the deal in the coming months, but the government also has a say over whether it goes ahead.
Currently the Universal Service Obligation (USO) requires Royal Mail to deliver letters six days a week throughout the country for the same price. But questions have been raised over whether the service could be reduced in the future.
In an exclusive interview with the BBC, Mr Kretinsky also said he would be willing to share profits with employees, if given the go-ahead to buy the group.
However, he appeared to reject the idea of employees having a stake in Royal Mail, which unions have called for in exchange for their support.
The Royal Mail board agreed a £3.6bn takeover offer from Mr Kretinsky in May for the 500-year-old organisation, which employs more than 150,000 people. Including assumed debts, the offer is worth £5bn.
But because Royal Mail is a nationally important company, the government has the power to scrutinise and potentially block the deal.
As well as keeping the new government on side, Mr Kretinsky also faces the task of convincing postal unions that the proposed deal will benefit employees.
The USO is a potential sticking point for both the government and unions.
Royal Mail is required by law to deliver letters six days a week and parcels five days a week to every address in the UK for a fixed price.
How well this has actually been working in practice is a different matter. Ten years ago, 92% of first class post arrived on time. By the end of last year it was down to 74%, according to the regulator Ofcom.
Last year the regulator fined Royal Mail £5.6m for failing to meet its delivery targets.
Royal Mail has been pushing for this obligation to be watered down. It wants to cut second class letter deliveries to every other weekday, saying this will save £300m, and lead to “fewer than 1,000” voluntary redundancies.
‘Unconditional commitment’
Mr Kretinsky has committed in writing to honouring the USO, but only for five years.
And after that, in theory, the new owners could just walk away from it.
However, Mr Kretinsky told the BBC: “As long as I’m alive, I completely exclude this, and I’m sure that anybody that would be my successor would absolutely understand this.
“I say this as an absolutely clear, unconditional commitment: Royal Mail is going to be the provider of Universal Service Obligation in the UK, I would say forever, as long as the service is going to be needed, and as long as we are going to be around.”
Mr Kretinsky added that the written five-year commitment was “the longest commitment that has ever been offered in a situation like this”.
Another potential stumbling block for the deal, however, is how the company will be structured.
Unions would like to see the company renationalised, but Dave Ward, general secretary of the Communication Workers Union (CWU), told the BBC that would be “difficult in the current political and economic environment”.
Instead, what the CWU is pushing for is “a different model of ownership” – that is, where the employees part-own the business.
To get its support for the takeover, the union wants employees to share ownership of the company, along with other concessions including board representation for workers.
It says profit sharing is “not going to be enough to deliver our support and the support of the workforce”.
If the union doesn’t get what it wants, it won’t rule out industrial action, Mr Ward said. Its members went on strike in 2022 and 2023.
Although Mr Kretinsky said he is “very open” to profit sharing, he is not in favour of shared ownership.
“I don’t think the ownership stake is the right model,” he said. “The logic is: share of profit, yes, [but an] ownership structure creates a lot of complexity.
“For instance, what happens if the employee leaves? He has shares, he is leaving, he is not working for the company, he [still] needs remunerating.”
Mr Kretinsky said he didn’t want to create “some anonymous structure” but instead “remunerate the people who are working for the company, and creating value for the company”.
The union is also concerned about job losses and changes to the terms and conditions of postal workers’ contracts.
Mr Kretinsky has guaranteed no compulsory redundancies or changes in terms and conditions but only until 2025.
“If we are more successful, and we have more parcels to be delivered, we need not less people, but we need more people,” he said. “So really, job cuts are not part of our plan at all.”
He said if the management, union and employees work together, “we will be successful”.
Another concern is the potential break-up of the business.
The profit for Royal Mail’s parent company last year was entirely generated by its German and Canadian logistics and parcels business, GLS. Royal Mail itself made a loss.
Mr Kretinsky has promised not to split off GLS or load the parent company with excessive debt, although borrowings will rise if the deal goes through.
But he has a way to go to convince the CWU.
“I can’t think of any other country in the world that would just just hand over its entire postal service to an overseas equity investor,” Mr Ward of the CWU said.
However, Mr Kretinsky said that the postal unions “do understand that we are on the same ship, and that we need this ship to be successful, and that if we are there, we don’t have any real problems to deal with, because the sky is blue, and it’s blue for everybody.”
The union cannot stop this deal but the government can block it under the National Security and Investment Act.
Business Secretary Jonathan Reynolds has said he will scrutinise the assurances and guarantees given and called on Mr Kretinsky to work constructively with the unions.
Mr Kretinsky may say that he and the unions are ultimately on the same ship but, as things stand, they are not on the same page.
Who is Daniel Kretinsky?
Daniel Kretinsky started his career as a lawyer in his hometown of Brno, before moving to Prague.
He then made serious money in Central and Eastern European energy interests.
This includes Eustream, which transports Russian gas via pipelines that run through Ukraine, the Czech Republic and Slovakia.
He then diversified into other investments, including an almost 10% stake in UK supermarket chain Sainsbury’s and a 27% share in Premier League club West Ham United.
The Czech businessman is worth about £6bn, according to reports.
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