If income tax thresholds remain frozen benefits should too
Consistency matters. If the fiscal situation is truly so dire that tax thresholds must remain frozen, then the same logic should apply to spending, says John O’Connell
The biggest casualty of the upcoming Budget will not be the rich or the poor. It will be those who are caught in the middle: the working and middle-income households already feeling squeezed.
The rumour is that the government is considering defining a “working person” as someone earning up to roughly £45,000 to £46,000 a year. That figure alone should raise eyebrows: if the threshold for “working” is set there, what does that say about everyone above it? The implication is that they’re somehow more able to carry the costs of a ballooning welfare state. That they can afford to shoulder yet more of the burden. That they should pay more again.
By drawing an artificial line at £45k, Labour can imply that anything done to those earning above it somehow won’t really hit “working people”. But of course it will. Most households earning just above that level don’t feel wealthy, many are senior paramedics, headteachers, school nurses, speech therapists, software developers or vets. They feel pressure. They face the same rising rents, mortgages, grocery bills and childcare costs as everyone else. And they already pay a sizable share of the tax take.
If thresholds for taxpayers are frozen, then benefit uprating shouldn’t be automatic either. If there’s no room to ease the burden on earners, there’s no room for new spending decisions
They also face something else, the Treasury’s quietest, most effective revenue-raiser: frozen tax thresholds. We’ve already seen how freezing the personal allowance, the basic-rate band and other tax thresholds quietly drags more people into higher tax bands each year. The OBR estimates that these threshold freezes will pull 4m more people into paying income tax, 3m more into the higher rate and 400,000 more into the additional rate by 2028. When inflation is high and wages rise to keep up, the Treasury’s tax take rises with them because the thresholds aren’t keeping pace. Families feel worse off even as their nominal pay goes up. The result is a stealth tax rise that hits middle-income households the hardest.
If the fiscal situation is truly so dire that tax thresholds must remain frozen, enough so that Labour is considering breaking its manifesto promise to not increase income tax, VAT or national insurance, then the same logic should apply to spending.
Stealth taxes
Yet speculation continues to rise that the two-child benefit cap could be scrapped. That would be a major new commitment and it sits awkwardly with the claim that the public finances can’t stretch to lifting tax thresholds even in line with inflation. If the public finances are truly so dire that households must endure ever-higher effective tax rates, why is there suddenly money available to expand welfare spending further?
A basic rule should apply: if thresholds for taxpayers are frozen, then benefit uprating shouldn’t be automatic either. If there’s no room to ease the burden on earners, there’s no room for new spending decisions. When there is space to unfreeze tax thresholds, that’s the moment to look again at benefit increases too. Consistency matters, especially when asking the public to trust tough choices.
Rumours of income tax rises, on top of the stealth rises already locked in until 2027-28, only add to the sense that governments of all colours see middle income households as the easiest place to turn when money is tight.
Rachel Reeves has spent months talking about fiscal credibility. But credibility isn’t built on slogans, it’s built on choices. And nothing undermines the claim to responsibility faster than insisting the country can’t afford to lift tax thresholds while simultaneously floating new spending commitments that run into the billions. You cannot plead poverty to taxpayers on Monday and hand out unfunded promises on Tuesday.
If the Chancellor wants to prove she is serious about discipline, she can start by being honest: frozen thresholds are tax rises. New spending is a choice. And middle earners – the people who keep the whole system afloat – cannot be treated as the government’s default cash machine.
John O’Connell is chief executive of the Taxpayers’ Alliance