Within hours of making a bid for Conservative Party Leader After Boris Johnson stepped down last week, high-profile candidates pledged tax cuts that risked leaving a black hole in the UK’s finances.
The economy is seen as a key issue in the race to be the UK’s next prime minister, with a dividing line emerging between candidates focused on maintaining Johnson government approach investors in public services and those who want to pursue supply-side reform.
Rishi Sunak, former prime minister and current favorite, made a cryptographic attack on Tories offers unrealistic commitments, which he describes as “consoling fairy tales”. In his campaign kick-off video, he asks: “Shall we confront this moment with honesty, seriousness and determination?”
Sunak has yet to give his full economic background but is expected to argue that, as prime minister, his approach is to blame. His campaign says “he will tackle inflation, grow our economy, and cut taxes. He wants to use the new-found freedoms that Brexit has given us, and the new mentality it can give us, to unleash growth.”
But several other competitors are proposing significant differences from Sunak’s policies, notably former health minister Sajid Javid, former health minister Jeremy Hunt and Secretary of State Liz Truss, who was previously scheduled to launch his campaign on Monday.
Other candidates, such as Prime Minister Nadhim Zahawi, Foreign affairs select committee chairman Tom Tugendhat and attorney general Suella Braverman, have talked about the need for tax breaks but have not laid out a plan.
The tax cuts pledges are designed to attract 358 Tory MPs, who will begin selecting a shortlist of candidates on Wednesday before the final two candidates are voted on by party members.
Research of the United Kingdom in an ideological organization that is changing Europe argues that Conservative MPs have substantial power over Tory members on economic issues, such as inequality and taxation, and moreover the right of the electorate.
Paul Johnson, director of the Institute for Fiscal Studies, said the size of some candidates’ pledges won’t be easy to fund. “Everyone wants lower taxes but [the candidates] need to be clear about the consequences,” he said.
He added that candidates will face two tough choices to fund their pledges. “Using that gap in tax cuts almost certainly means big real terms that cut wages,” he said. “An alternative is of course to borrow more, contrary to the Conservative Party manifesto. It can be risky in a high-inflation environment,” he said.
Financial Times analysis of pledges from top candidates shows how much each pledge will cost.
Javid, who promises £49.4bn, has applied the most expensive tax cut of any candidate to date. The former prime minister proposed cutting the corporate tax rate by 1 percentage point per year until the tax rate is 15%. As prime minister, Sunak planned to increase the rate from 19% to 25% next April.
According to the HM Revenue & Customs ready calculation, the cost of a 15% tax rate versus a 25% tax rate would be £34 billion a year.
Javid has also pledged to reverse the government’s planned increase in national insurance, which will grow by £18 billion a year by 2025-26, although costs will be lower – £13 billion a year by 2025-26 – if he also reverses the raised threshold to pay contributions.
His other proposals include introducing a plan to cut income tax from 2024 to next year, which will cost £6bn a year until 2024-25, and further fuel tax cuts, which will cost £2. £4 billion for every 5p tax cut from a liter of petrol or diesel.
Assuming the fuel and income tax proposals are only temporary, the total cost of the Javid tax cuts would be between £47 billion and £52 billion a year, or around 2% of gross domestic product.
In an interview with the Sunday Telegraph, Javid defended his approach. “There are some who say you can’t cut taxes until you have growth. I think that is a mistake. I think it’s fundamentally flawed analysis. I think you can’t grow until you get a tax cut. “
Hunt didn’t go as far as Javid when he bid for the helm, with proposals worth a combined £39billion. He proposes an immediate corporate tax cut to 15%, costing £34bn, along with a five-year business price holiday in the most deprived parts of the country. The cost of this will be determined by how the areas are defined.
An ally of Hunt said his tax cut plan would “unfreeze the growth that has been lacking in our economy for so long: the tax cuts for large Irish corporations in the ’90s created the ‘Celtic tiger’ economy; Jeremy’s will do the same for the UK”.
However, by reducing the corporate tax rate to 15%, the effective average tax rate, after allowances have been taken into account, would cause the UK to breach the new minimum global corporate tax rules. The OECD agrees.
This would allow other countries to collect tax on profits made in the UK, effectively removing any incentive for foreign investment from the lower rate while losing money on the excess. via.
Dan Niedel, founder of the Tax Policy Association think tank, said the UK tax cuts would be “completely pointless” because London would “give away tax revenue to other countries”.
Truss has yet to commit to cutting corporate taxes, but she has promised to reverse the government’s national insurance increase, which will cost between £13 billion and £18 billion a year by 2025-26, depending on on whether payment thresholds are reversed.
An ally of Truss said her offer would “create a head start for the economy. She will do a quick and smart spending review, among other things. Liz’s second and third priority is economic growth. She will boldly reform the supply side, which is something the Tory government has long promised but Liz will deliver.”
