Chancellor Jeremy Hunt made much of his tax-cutting credentials in the Autumn Statement. 

The main rate of national insurance contributions (NICs) was cut for both employees (from 12% to 10%) and the self-employed (from 9% to 8%), in addition to abolishing Class 2 NICs.

But looking at the tax to GDP ratio tells a different story. The tax burden - the percentage of the nation’s income going to the government - is still on track to rise to a post-war high.

The Office for Budget Responsibility (OBR) forecasts that the tax-to-GDP ratio will be at 37.7% at the forecast horizon in 2028/29. 

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The tax burden is now expected to be 4.5 percentage points higher in 2028/29 than it was pre-pandemic, and 0.4 percentage points higher than the OBR projected in March.

One big reason is the freezing of most income tax thresholds so they don’t rise with inflation. 

This is fiscal drag – where people are “dragged” into higher tax brackets than they otherwise would have been.

This increase in the tax burden comes alongside a pretty dismal set of economic forecasts. 

The recovery from the pandemic might have been stronger than previously thought, but the OBR now forecasts growth to be lower in every year until 2026, and inflation to stay higher for longer.

Slowing growth and persistent inflation, together with the high tax burden, mean living standards are expected by the OBR to remain below pre-pandemic levels until 2027/28. 

This would be almost a full decade of stagnation.

The Chancellor has announced the permanent extension of his ‘full expensing’ (FE) policy, temporarily introduced for three years in March 2023. 

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This allows companies (not including unincorporated businesses such as self-employed, sole traders and partnerships) to immediately write off the full cost of investment in new plant and machinery against taxable profit in the year the investment cost incurred. 

While the move to a permanent measure is expected to increase business investment in the medium to long run, there is no guarantee of the quality or productivity of these investments, which is required to boost output and economic growth.

The two main tax measures - lower NICs and making full expensing permanent - are UK-wide, and apply automatically in Scotland.

Some other measures announced are England-only, and therefore bring with them additional funding for the Scottish Government through the Barnett formula, totalling £233m in this financial year and £281m in the next. 

The main measures generating consequentials are:

  • The funding of the pay award for the NHS in England in 2023/24, which generates £235m;
  • The 75% relief on business rates in England for the retail, hospitality and leisure sectors in 2024/25, up to a £110,000 cash cap, which generates £232m;
  • Freezing the small business multiplier in England in 2024/25, which generates £32m.

As these are devolved matters, the Scottish Government receives this funding but is under no obligation to match the policies announced by Westminster.

So this is one to watch out for at next month’s Scottish Budget.

Settlements with the Treasury are only fully determined until 2024/25. 

Nevertheless, the UK Government budgets on a five-year basis, and has to give the OBR an indicative assumption for departmental and devolved spending. 

This is only indicative at this time, but if the OBR’s forecast comes to pass, it would mean Scottish Government spending power being higher in each year by between £1.1bn and £1.4bn from 2025/26 onwards.