The Institute for Fiscal Studies has revealed the Treasury will receive around £12.5billion more in revenues from freezing income tax thresholds than previously announced.
The economic think tank found that Rishi Sunak's original proposal, to gather £8billion by stopping the point at which people start paying a higher tax rate increasing in line with prices, is now expected to be £20.5billion.
The Chancellor, who will deliver his Spring Statement to the House of Commons on Wednesday March 23, has been met with backlash from Tory MPs who are lobbying against the increase in National Insurance in April 2022.
The cost of living is set to soar this year, not least due to the rising price of energy, which has been pushed up by Russia’s invasion of Ukraine.
Chancellor Rishi Sunak will make a "mini-budget" statement to Parliament next week.
Justin Tallis
Without intervention, public sector workers face an average real-terms pay cut of around £1,750 due to inflation, while many households will struggle to keep up with bills.
Tom Waters, senior research economist at the IFS, said: “Usually tax thresholds go up in line with inflation. Last March, when the Chancellor announced a four-year freeze in income tax thresholds, inflation was fairly low and so he expected it to raise about £8billion per year."
“Since then inflation has risen rapidly and is expected to rise even further, peaking at more than 8 percent. That means that the tax threshold freeze is now on track to be a £20.5billion tax hike – two and a half times what was originally expected.”
Mr Waters told the Telegraph: “This episode highlights the danger with setting tax thresholds in nominal terms for long periods of time – unexpected changes in inflation can make the size of a planned tax rise much bigger or smaller than expected.”
Labour leader Sir Keir Starmer accused Boris Johnson of introducing a series of “stealth taxes” on working people at Prime Minister's Questions on February 2.
Labour leader Sir Keir Starmer accused the Prime Minister of introducing a series of “stealth taxes” on working people.
Victoria Jones
His examples included freezing the threshold for income tax and tuition fees, as well as “local authorities forced to increase council tax”.
Sir Keir said: “You can be as stealthy as you like but you can’t hide reality. We have the highest tax burden for 70 years during the middle of an inflation crisis. So, I ask the Prime Minister again, why do he and the Chancellor keep raising taxes on working people?”
Mr Johnson replied: “What we are doing is helping people with the cost of living and cutting taxes for those on Universal Credit, as I answered, helping propel with the cost of their fuel with the cold weather payments, the warm homes payments, doing all the things that this country would expect, lifting the living wage, which this party introduced, this Government has increased by a record amount, and above all the most important thing that we are doing is helping people into work.”
There are three massive choices facing the Chancellor on what was originally meant to be a fairly uneventful Spring Statement this month, the IFS said.
Either he will have to borrow billions or risk the worst hit to households for decades.
He will also have to impose severe real-term pay cuts on teachers, nurses and others in the public sector, borrow even more to pay them better or cut back spending on other public services.
As war rages in eastern Europe the Chancellor will also have to decide whether to allow defence spending to fall over the next three years, or again borrow to boost it.
IFS director Paul Johnson said: “At the Spring Statement Rishi Sunak has to make a huge judgment call.
“Will he do more to protect households from the effects of energy prices which have risen even further in the last two weeks?
“If he doesn’t then many on moderate incomes will face the biggest hit to their living standards since at least the financial crisis.
“If he does, then there will be another big hit to the public finances.
“While he had little choice over big state action through the pandemic, his response to this crisis will tell us more about how he sees the limits of government in protecting citizens from buffeting by external forces.”