Spring Statement may seem encouraging, but stealth tax puts the brake on economic growth

MEDIA STATEMENT - Following the Chancellor’s Spring Statement, ICAS (Institute of Chartered Accountants of Scotland) has warned that continued reliance on frozen tax thresholds risks undermining economic growth.

Gail Boag, CEO at ICAS, said: 

“Today’s Spring Statement paints a slightly improving economic picture, but these short-term positives are a distraction from the absence of a sustainable, long-term tax strategy. Talking about boosting GDP by 5.6% by the end of this parliamentary term means little if those modest gains are swallowed up by rising tax burdens.

“Freezing tax thresholds has become successive governments’ go-to stealth tactic to raise taxes. As wages rise with inflation while thresholds remain the same, more people are pushed into higher tax bands, reducing their take-home pay and leaving households with less to spend across the economy. 

“If thresholds had risen with inflation since 2021, the personal allowance would now be around £15,550 instead of £12,570, and the higher-rate threshold closer to £62,000 rather than £50,270. This ‘fiscal drag’ effect is quietly pulling more middle-income earners – including teachers, police officers and senior nurses – into higher tax bands, while bringing some lower earners into the tax system for the first time.  

“Inflation may be easing, but many households are still struggling with the impact of the cost-of-living crisis. Any expected lift in living standards is being wiped out by fiscal drag, reducing disposable income and hitting lower income families hardest – especially those who spend more of their money on essentials like food, fuel and housing. Fiscal drag asks people to do more with less. Forcing households to stretch their shrinking budgets even further doesn’t incentivise work at a time of high unemployment, fails to boost productivity or spending, and erodes trust in the tax system.

“Relying on fiscal drag to raise revenue by default rather than by design isn’t a sustainable substitute for strategy. The government needs to use the time between now and the Autumn Budget to set out a clear, long-term tax strategy that genuinely supports work, attracts investment and drives economic growth.”