This article was first published in The Express – 29th July 2022.
While the two candidates vying to be the next Prime Minister – Liz Truss and Rishi Sunak – agree on many things, they have a major difference of opinion about the economy and tax.
Rishi is cautious. He wants to keep policy tight and taxes high. He does want lower income taxes – but not yet. But he is still in favour of higher business taxes next spring. Then, corporation tax is set to rise from 19% to 25%.
Alongside other negative changes to investment allowances at that time, Britain will slump from 18th to 31st out of 38 OECD countries for business taxation. It hardly sends a positive image about the UK being a good place to invest.
Currently, the UK is heading for its highest tax burden in seventy years. This undermines competitiveness and exacerbates the cost of living crisis that people are facing.
Instead, Liz Truss recognises the need to give the economy a helping hand now. She wants to cut taxes. Voters appear to agree – whether they opt for Conservative or Labour. A Techne U.K. poll showed 76 percent of Tory and 57 percent of Labour voters support lower taxes, now.
There is a strong economic case for tax cuts. Timely and targeted tax cuts are affordable, not inflationary and necessary. This is because the economy faces twin problems: rising inflation and weakening demand.
They are affordable. At the time of the Spring Statement, there was fiscal space that was not used and since then higher inflation has provided a windfall gain to the Treasury by boosting tax revenues.
Tax cuts are not inflationary because of the nature of our inflation shock. If inflation was being caused by a buoyant, overheating economy it would be right to question the wisdom of tax cuts. Instead, inflation is sky high because of supply-bottlenecks, soaring fuel prices and previously lax monetary policy.
It is not up to politicians but the Bank of England to get inflation back in check. Importantly, interest rates and tax cuts are not opposite ends of the same see-saw. Cutting taxes does not mean interest rates need to rise any more than they already would.
Indeed in May, when he was Chancellor, Rishi Sunak unveiled a much-needed £15 billion boost. At the time, the Bank of England said that boost would add only 0.1% to inflation over the next year. That’s hardly inflationary. Retail prices are currently rising by 11.7%.
Instead, political focus should be on the fragile economy that means tax cuts are necessary. Voters can see that.
Consumer confidence is rock bottom, despite a healthy jobs market. Rising fuel prices look set to make the outlook worse, as they eat into peoples’ disposable income. Recession is possible and policy should be geared to preventing this.
Liz Truss is keen to halt next spring’s rise in corporation tax and to reverse last autumn’s unnecessary rise in national insurance. She views that as a broken manifesto promise. Economists view it as an unnecessary tax on jobs.
Another option is to reduce taxes on fuel. Truss has proposed suspending the environmental levy on fuel bills. Germany has done this without undermining green credentials. It is about peoples’ ability to pay.
According to the Office for Budget Responsibility, such levies are £6.9 billion this fiscal year, or an average of £248 per household per year. This week Sunak came out in favour of cutting the five per cent VAT on fuel, which he had opposed previously. Another option is to cut petrol duties.
Cutting income tax, or increasing tax thresholds are other options. But not everything can be done at once. Affordable options on public spending and on tax will need to be considered in an earlier than usual Budget.
Yet it will be critical to provide further help to those on low incomes to help pay their fuel bills. And there is a strong case for targeted tax cuts to happen immediately when a new Prime Minister is elected.