How cuts to marginal income tax could boost the UK’s stagnant economic growth

By Dawid Trzeciakiewicz, Loughborough University, Richard McManus, Canterbury Christ Church University

The British prime minister recently claimed the UK economy has “turned a corner”. Rishi Sunak said inflation figures were encouraging, and proclaimed that 2024 would be the year Britain “bounces back”.

According to his chancellor, Jeremy Hunt, the latest GDP figures show the government’s plan is working. And it’s true that inflation is at its lowest rate for two years, which indicates some easing of the cost-of-living crisis. But prices are still rising, and average incomes have seen limited growth for nearly 20 years.

The broader UK numbers are not very encouraging either. GDP per person has grown by 5.6% since 2007, an annual increase of less than 0.4% a year. In comparison, for the 17 years before 2007, it had grown by 45%, an annual increase of 2.8%.

Growing the economy means more jobs, higher household incomes, and higher standards of living. The clear absence of growth for over a decade has been widely felt.

The median UK household has seen an increase of 9.6% in its disposable (after-tax) income since 2007, which works out at just 0.7% a year. For the lowest earners, this figure is less than 0.2%.

The global financial crisis, Brexit and COVID have all contributed to lower economic growth across most of the world, which results in weak growth in incomes and tax revenues.

So how can incomes for everyone be increased?

Marginal income tax rates

One area worthy of investigation is marginal income tax rates, and the effects they have on the economy. The UK has what’s known as a progressive income tax system, in which the rate you pay is divided into various bands.

When we talk about marginal tax rates, we mean the tax you pay on the next pound you earn. For example, if you earn £51,000, the tax you pay on the next pound earned is £0.40. This means you are paying a marginal tax rate of 40%.

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