Andy Burnham, the newly appointed Prime Minister, has stepped back from his earlier suggestions regarding an increase in the tax-free personal allowance, currently set at £12,570 and frozen since 2021. This freeze has unintentionally led to more individuals entering the tax bracket as wages rise.
In comments made over the weekend to The Times, Burnham acknowledged the public frustration surrounding the personal allowance, a sentiment he picked up during his campaign for the Makerfield by-election. However, during a press briefing on Monday, he tempered expectations, stating that while the issue would be addressed in the upcoming budget, any adjustments would be financially challenging.
Fiscal Discipline at the Forefront
Sources close to Burnham have clarified to BBC News that revising the personal allowance is not a priority in his initial strategy to combat the escalating cost of living. During his inaugural cabinet meeting, Burnham emphasised the need for “fiscal discipline,” insisting that the government must demonstrate a genuine commitment to financial responsibility by making tough choices.
Burnham has promised to adhere to Labour’s 2024 manifesto, which explicitly states that there will be no increases in the basic, higher, or additional rates of income tax. This commitment effectively rules out raising the top tax rate for high earners to balance the financial implications of lifting the personal allowance.
Cost Implications of Unfreezing the Allowance
The Institute for Fiscal Studies has estimated that unfreezing the personal allowance could cost the government between £8.5 billion and £9 billion annually. Burnham remarked on Monday that he is aware of the repercussions this issue has on citizens. He reiterated that while it would be reviewed in the budget, the current financial landscape complicates the matter significantly.
In a bid to address the immediate cost-of-living crisis, Burnham has instructed his cabinet to lead a “cost of living government,” urging ministers to reconsider their budget allocations.
New Measures to Tackle Living Costs
In a proactive move, Burnham announced a VAT reduction on household electricity bills, effective from 1 October, which is expected to save the average household around £45 per year. This initiative, costing approximately £850 million, will be funded by scrapping the digital ID scheme proposed by former Labour leader Sir Keir Starmer. However, this funding strategy has come under scrutiny; former Chief Secretary to the Prime Minister, Darren Jones, has pointed out that the digital ID programme remains unfunded, urging the government to clarify its financial plans in the upcoming budget.
Additionally, Burnham has unveiled further measures aimed at alleviating financial pressures on working families. Most notably, he announced a significant reduction in the national cap on all bus fares outside London, lowering the rate from £3 to £2, set to take effect in January.
Why it Matters
Burnham’s cautious approach to tax policy reflects the broader struggle of governments to balance fiscal responsibility with the pressing needs of citizens facing rising living costs. While his commitment to maintaining tax rates may please some, it raises questions about how effectively his administration can address the urgent financial pressures many Britons are experiencing. The decisions made in the coming weeks will be crucial in shaping the economic landscape and could define Burnham’s tenure as Prime Minister.
