UK Cuts Income Taxes Again: Economists Ask Whether This Makes Financial Sense

The United Kingdom has been engaging in a surprising program that has raised the “personal allowance,” or amount one can earn before paying income taxes, to record highs. The result of this program has left nearly 4 million people out of the annual income tax cycle and acted as a tax break for 27 million. But, as the nation struggles with sluggish economic growth, economists wonder if this politically popular measure makes good financial sense.

The United Kingdom has been engaging in a surprising program that has raised the “personal allowance,” or amount one can earn before paying income taxes, to record highs. The result of this program has left nearly 4 million people out of the annual income tax cycle and acted as a tax break for 27 million. But, as the nation struggles with sluggish economic growth, economists wonder if this politically popular measure makes good financial sense.

At first blush, the program seems to have all the hallmarks of a popular program for a nation that is experiencing an exceptionally prosperous era. However, the UK has some of the most severe austerity measures in Europe, and the nation has been experiencing sluggish economic growth for years.

The personal allowance program has been championed by Britain’s Liberal Democratic party and enjoys 83% support from the voting populace. It is little wonder from a political perspective that these measures have continued to expand year after year. In order to absorb the impact of these lost revenues, the government has simply gone from a form of direct taxation (via income tax) to indirect taxation (via sales taxes, luxury taxes, etc.). In fact, since 2010, the UK has raised taxes by ₤64 billion, but offset these increases by cuts of ₤48 billion thanks to personal allowances.

The government announced further expansion of the personal allowance on March 18, 2015, raising the personal allowance another ₤1,000 by 2017. This would effectively remove everyone receiving the minimum wage from the burden of paying income taxes. However, thanks to the shift to indirect taxes, the benefit is lost on Britain’s poorest. Most of the benefit of this most recently announced tax cut would go to the richest 50% of families and retirees; prompting some to point out that this is no longer a program to benefit Great Britain’s poorest, but to camouflage popular middle-class tax cuts for purely political purposes.

Nevertheless, while the program makes complete sense from a political perspective, it has left many economists wondering whether it makes good financial sense. As noted, the UK has unusually severe austerity measures and a slowed economy. The boost to the economy, individual earnings, and drop in unemployment that relaxing some of these austerity measures could bring might actually do more to stimulate the economy and benefit those affected by the personal allowance than the current plan.

With general elections in May, an announcement of further tax cuts is much more popular than one proposing overhauling the system. Thus, it appears Britain will remain on this path for the foreseeable future (or at least until after the elections). The question remains as to whether the government may address better long-term measures for growing the national economy at that time.