IEA unvils £75bn of tax cutting plan – saving typical worker £644 a year
The IEA Alternative Budget would cut taxes on a median paid job by around £1,300 a year, slash employer National Insurance by £21bn, abolish stamp duty and inheritance tax and introduce new Defence Bonds to help fund Britain’s military.
The Institute of Economic Affairs (IEA) has today unveiled a £75bn tax cutting Alternative Budget that would cut income tax and employee National Insurance for a typical worker by £644 a year.
Published ahead of the chancellor’s Budget, the IEA’s proposals combine major tax reform with spending restraint, with the aim of reducing taxes on work and employment while bringing the public finances under control.
Rather than increasing the overall tax burden to address the deficit, the IEA proposes a major reshaping of the tax system. Taxes on earnings, hiring, property transactions and trade would be cut or abolished, while the VAT base would be broadened so that more revenue is raised from consumption.
The tax reforms would be accompanied by tighter control of welfare spending and wider reforms to planning, regulation and saving. The IEA’s fiscal projections do not assume additional revenues from stronger economic growth or savings from lower borrowing costs.
Under the proposed reforms, someone earning the median wage would pay £644 less a year in income tax and employee National Insurance. Once the reduction in employer National Insurance is included, the total tax burden on a median-paid job would fall by around £1,300 a year.
The Alternative Budget also proposes a new Defence Bond to help finance Britain’s growing defence commitments. Available exclusively through stocks and shares ISAs, the bonds would allow British savers to invest directly in the country’s defence, with the money raised ring-fenced for military spending. The proposal would be accompanied by an increase in the annual ISA allowance from £20,000 to £50,000.
Key measures in the IEA Alternative Budget include:
- Lower taxes on jobs: Cut employer National Insurance to a flat rate of 11.5%, saving employers almost £21bn in 2027 – 28.
- Scrap stamp duty on homes: Abolish Stamp Duty Land Tax in England and Northern Ireland, reducing the cost of moving home, whether for work, to be closer to family or to downsize. The measure represents a £19.2bn tax reduction in 2027 – 28.
- Abolish inheritance tax: Scrap Inheritance Tax from April 2027, representing an £11.2bn tax reduction in 2027 – 28.
- Tax work less through a broader VAT: Finance cuts to income tax and employer National Insurance by extending the existing 20% VAT rate, including to food, water and passenger transport. The reform is estimated to raise around £75bn in 2027 – 28, shifting taxation away from income and transactions and towards consumption.
- New Defence Bonds to fund Britain’s military: Introduce a new Defence Bond available exclusively through stocks and shares ISAs, with funds ring-fenced for national defence spending. The proposal would sit alongside an increase in the annual ISA allowance from £20,000 to £50,000, giving British savers a new way to invest in the country’s defence.
- Control welfare spending: Reduce the cash spending ceiling by 0.85% annually for three years, including suspending the State Pension triple lock and freezing the basic State Pension. The reforms are projected to produce net savings of £11.9bn in 2027 – 28, rising to £56.7bn by 2030 – 31.
- Tackle the budget deficit and national debt: The measures are projected to deliver a £7.8bn current-budget surplus in 2027 – 28, without assuming additional revenues from faster economic growth. Net debt is projected to fall to 91.6% of GDP by 2030 – 31.
- A £50,000 ISA allowance and new Defence Bond: Increase the annual ISA allowance from £20,000 to £50,000, alongside a new ISA-eligible Defence Bond dedicated to funding national defence.
- Make Britain a tariff-free economy: Abolish customs tariffs, reducing taxes on imported goods and the inputs businesses need.
- Get Britain building and innovating: Introduce development rights in designated growth areas and faster planning decisions for homes, laboratories, businesses and major infrastructure.
- End compulsory electric-car sales targets: Abolish the Zero Emission Vehicle mandate and its credit-trading scheme, removing compulsory sales targets for manufacturers.
Overall, the IEA projects that the Alternative Budget would move the current budget into a £7.8bn surplus in 2027 – 28. By 2030 – 31, cumulative borrowing would be £127.2bn lower than the OBR baseline and net debt would fall to 91.6% of GDP – without assuming additional revenues from faster economic growth.
Commenting, Lord Hannan, director general, Institute of Economic Affairs, said: “Britain cannot tax its way to prosperity. For too long, we have loaded ever higher taxes onto work, enterprise and investment, and then wondered why economic growth has disappointed.
“The IEA Alternative Budget shows that there is another way. It is possible to reduce damaging taxes, make it easier to hire, invest, build and trade, and still bring the public finances under control, but only if we are prepared to make difficult choices about tax and spending.
“At a time when Britain urgently needs to strengthen its defences, we should be looking for innovative ways to finance that investment. Our proposed Defence Bonds would give British savers the opportunity to put their money towards strengthening the country’s security.
“John Healey’s first Budget as chancellor is an opportunity to change course. We want to show the government that yet another round of tax rises is not the only option. Britain needs serious reform if we are to get the economy growing and put the public finances back on a sustainable footing.”
Dr Valentin Boboc, chief eeconomist, Institute of Economic Affairs, said: “Britain’s tax system puts too much of the burden on people earning, businesses hiring and families moving home. Our Alternative Budget would change that by cutting damaging taxes and making sure public finances can rely on a healthier and more optimal tax base.
“But tax cuts have to be paid for. That means making difficult choices on spending as well as tax. What we are not proposing is a giveaway funded by more borrowing.
“Nor are we relying on wishful thinking about growth to make the numbers add up. These plans are designed to bring borrowing down and get the public finances back under control.”