Hours after the Conservative party leadership bids were launched following Boris Johnson’s resignation last week, senior candidates have pledged sweeping tax cuts that threaten to leave a black hole in the UK’s finances.
The economy is set to be a defining issue in the race to become the UK’s next prime minister, with a dividing line already emerging between contenders focused on maintaining the Johnson government’s approach to investing in services and those wishing to pursue supply-side reform.
Rishi Sunak, the former chancellor and current favourite, launched a coded attack on the Tories by offering unrealistic promises, which he described as “heartwarming fairy tales”. In the video launching his campaign, he asked: “Are we facing this moment with honesty, seriousness and determination?
Sunak has yet to set out his full economic platform, but he is expected to say that as chancellor his approach was responsible. His campaign said that “he will tackle inflation, grow our economy and cut taxes. He wants to use the new freedoms Brexit has given us, and the new mentality it can give us, to unleash growth.”
But several other candidates are proposing significant divergence from Sunak’s policies, including former Health Secretary Sajid Javid, former Health Secretary Jeremy Hunt and Foreign Secretary Liz Truss, who is expected to launch her campaign earlier. Monday.
Other candidates, such as Chancellor Nadhim Zahawi, Foreign Affairs Select Committee Chairman Tom Tugendhat and Attorney General Suella Braverman, have spoken of the need to cut taxes but have not set out plans.
The promises to cut taxes are designed to attract the 358 Tory MPs who will begin choosing a shortlist of candidates on Wednesday before the final two candidates are elected by party members.
Research by the UK’s Changing Europe think tank suggests Tory MPs are significantly to the right of Conservative party members on economic issues, such as inequality and taxes, and are more to the right of voters.
Paul Johnson, director of the Institute for Fiscal Studies think tank, said the scale of the promises of several of the candidates would not be easy to fund. “Everyone would like a tax cut, but [the candidates] must be clear about the consequences,” he said.
He added that candidates would face two tough choices to fund their pledges. “Using this leeway on tax cuts almost certainly means big real cuts in public wages, for example,” he said. “An alternative of course is to borrow more, contrary to the Conservatives’ manifesto. This can be risky in a highly inflationary environment.
The Financial Times analysis of the pledges of the main candidates shows how much each would cost.
Javid, whose promises would cost £49.4billion, passed the most expensive package of tax cuts of any candidate to date. The former Chancellor proposes to reduce the corporate tax rate by 1 percentage point per year until it is 15%. As chancellor, Sunak planned to raise the rate from 19% to 25% next April.
The cost of a 15% corporation tax rate compared to a 25% corporation tax rate would be £34billion a year, according to ready-to-use calculation tables from HM Revenue & Customs, which provide an estimate of the general costs of tax cuts.
Javid has also pledged to reverse the government’s planned increase in National Insurance, which will rise by £18bn a year by 2025-26, although the cost would be lower – £13bn per year by 2025-26 – if it also reverses the increased threshold. for payment of dues.
His other proposals include the postponement of the planned 2024 income tax cut to next year, costing £6billion a year until 2024-25, and further fuel duty cuts, which would cost £2.4billion for every 5p cut on a liter of petrol or diesel.
Assuming the fuel tax and income tax proposals are temporary, the total cost of the Javid package of tax cuts would be between £47bn and £52bn a year, or around 2% of proceeds raw interior.
In an interview with the Sunday Telegraph, Javid defended his approach. “Some say you can’t have tax cuts until there’s growth. I think that’s wrong. I think this is a fundamentally flawed analysis. I think you can’t have growth until you have the tax cuts.
Hunt did not go as far as Javid when he applied for the leadership, with proposals costing a total of £39billion. He proposed an immediate reduction in corporation tax to 15%, costing £34billion, alongside a five-year suspension of work rates in the most deprived parts of the country. The cost of this would be determined by how the zones were defined.
A Hunt ally said his tax cut plan would “unleash the growth that has been missing in our economy for too long: the big corporate tax cuts in Ireland in the 1990s created the ‘tiger’ economy Celtic”; Jeremy’s will do the same for the UK.
However, by lowering corporation tax to 15%, the effective average rate, once allowances are taken into account, would leave the UK in breach of the new OECD-agreed global minimum corporate tax rules. .
This would allow other countries to collect tax revenue from profits made in the UK, eliminating any incentive for foreign investment because of the lower rates while losing money for the Treasury.
Dan Niedel, founder of the Tax Policy Associates think tank, said UK tax cuts would be “totally unnecessary” because London would be “giving up tax revenue to other countries”.
Truss has yet to promise corporation tax cuts, but she has promised to roll back the government’s National Insurance increase, which would cost between £13-18billion a year by 2025 -2026, depending on whether the payment thresholds were also reversed.
A Truss ally said his pitch would “offer a start on the economy. She will do a quick and smart review of expenses, among other things. Liz’s second and third priorities are economic growth. She would be bold on supply-side reform, something Conservative governments have long promised, but Liz would stick.