Bleak midwinter for the economy? It could be worse…
The political and economy outlook for the UK may seem gloomy, but spare a thought for our European counterparts, says Tim Sarson
It’s the last working week of 2024 for many of us. I’ll be switching off the laptop on Friday afternoon and packing up for what I hope is a restful Christmas break, give or take the inevitable few urgent “sorry to disturb you on your holidays” texts.
It’s been a busy year here in Britain for tax. The traditional pre-election giveaway budget from the outgoing Conservative government, then a general election, followed by the equally traditional tax-raising first Budget from an incoming administration that left some quarters of the country unhappy as we headed toward the end of the year, especially with national debt continuing to rise and growth looking a little harder to come by.
A downbeat note to end the year? Well, spare a thought for Michel Barnier. He’s just resigned as French Prime Minister this month after 90 days in office, thanks to a hugely unpopular October Budget.
What got the French parliament’s goat? Some of the measures might seem a little familiar. The government had promised to concentrate tax rises on wealthy individuals and large companies, but then they slashed tax relief on social security contributions for low wage workers leading to precisely the same complaints about affordability from employers as here. At the same time, they reversed a temporary tax cut on electricity – not identical to our own Winter Fuel Allowance changes, but with a similar effect on household finances. Now that the original Budget has been thrown out, France is defaulting back to yet another recognisable tactic: it’s playing the fiscal drag game and freezing income tax thresholds.
France’s fiscal woes
France’s fiscal woes are part of a familiar pattern across Europe that’s been visible since Covid, and indeed off and on since the 2008 financial crisis. An inexorably ageing population expands social security and healthcare costs at the same time as shrinking the pool of working age taxpayers; regular economic and fiscal shocks send even the most conservative fiscal forecasts off course – first the banking crisis, then the Eurozone debt crisis, then Brexit, Covid and most recently the inflationary hit of the Russian invasion of Ukraine. All while economies are trying to complete the transition to low carbon energy.
Back to the farmers. Early this year they were doing the same in Germany, France, Portugal and Greece. The specific gripes varied, but in France the casus belli was a threatened removal of a tax break for farmers on diesel. Perhaps I shouldn’t have been so surprised our new Chancellor demurred on reversing the temporary fuel duty cut.
Fuel duty hikes have a long history of triggering protests and blockades. They were after all what first saw the Gilets Jaunes out on the streets.
The other consistent theme across three years of continental farming protests has been green measures: regulations and taxes. Paying for our demographic decline is hard enough; it’s clear that pushing through net zero and cleaning up our countryside will be scarcely easier.
Paying for our demographic decline is hard enough; it’s clear that pushing through net zero and cleaning up our countryside will be scarcely easier.
I wrote about the US tax situation last month. Lest you think America is a fiscal paradise by comparison, bear in mind their federal deficit next year is expected to be just over six per cent of Gross Domestic Product (GDP): higher than France’s.
If this all seems lacking in Christmas cheer, then console yourself this way: we’re all in it together. Indeed, maybe some of them are rather more “in it” than we are. The OBR predicts public sector net borrowing at a little over four per cent this year and next. Our debt to GDP ratio is lower than most of our G7 partners. It may not feel like it, but our tax burden as a share of the economy remains lower than most of Europe too. While several other countries are back in a cycle of raising corporation tax rates, this Autumn’s tax roadmap fixes ours in place for five years.
So as you shut down your own laptops for the Christmas break, console yourselves with knowing that it could be worse.
Tim Sarson is head of tax policy at KPMG