The scale of the tax cuts promised by Tory leadership candidates would blow up public finances and could lead to runaway inflation, Tory opponents and economists have warned.
Nadhim Zahawi, who took office as Chancellor last week, used a leadership speech on Monday to announce tax policies that would cost around £50billion a year, almost as much as the Ministry of Health’s combined budgets. Defense and the Ministry of Foreign Affairs.
Sajid Javid, the former health secretary who also served as chancellor, launched his leadership bid with tax cuts he said would cost around £40billion a year, including a cut of income tax, the removal of the recent National Insurance increase and a temporary 10p a liter additional fuel tax cut.
Of the 11 candidates vying to become the new prime minister, nearly all have made lavish promises to cut the rate of taxes and shrink the state, with costs generally left vague.
The pound has fallen to a two-year low in recent weeks amid growing concern over the strength of the UK economy and political instability amid intense pressure on households and businesses.
Economists said the proposals would risk fueling inflation and inequality, while increasing government borrowing or requiring sweeping spending cuts. Rishi Sunak’s camp believe some of the pledges would lead to a fiscal black hole amounting to tens of billions of pounds.
Nick Macpherson, the former senior Treasury mandarin, said the candidates showed themselves “less the heirs of Margaret Thatcher; plus the followers of Recep Erdoğan,” referring to the Turkish president’s economic policies, which have been blamed for contributing to inflation reaching almost 80%.
Gavin Barwell, a Tory peer who was Theresa May’s senior aide, said leadership candidates risk telling the Tory party “what it wants to hear”, not the truth.
“You can’t have Thatcher’s levels of taxation and Johnson’s levels of public spending – especially given the damage Brexit has done to the economy and the increased demand for public services post-Covid,” he said. said Barwell. tweeted.
Labor said multibillion-pound pledges had been “casually flung on the pages of the newspapers” within days.
Pat McFadden, the Shadow Chief Secretary to the Treasury, said: “Tax cuts must be sustainable. They cannot simply be plucked out of thin air. They claim to be able to fund them through efficiencies or staff reductions. Then it will be the tooth fairy. If the Labor Party made promises like this, we would be killed for it.
A series of candidates have said they will scrap a planned corporate tax hike due next April from 19% to 25%, with Javid promising to reduce the headline rate to 15% over time.
According to HMRC calculation tables readywho provide rough estimates of the cost of the tax changes, a cut of 10 percentage points would cost £32billion a year by the end of the current legislature in 2024-25.
Another candidate, Attorney General Suella Braverman, used her Monday speech to say much of public spending could be replaced with a bigger role for families and communities.
Zahawi has pledged to cut income tax by 2p by 2024, scrap the corporate tax hike and scrap VAT and green fuel levies for two years. The former education secretary said his plans could be funded by cutting the number of civil servants by 20%, although this should save less than a tenth of the cost of his proposed tax cuts.
On Zahawi’s promises, Torsten Bell, the head of the Resolution Foundation think tank, calculated that changes to income tax, energy bills and corporation tax would total $50 billion. pounds a year by 2024. That’s just £5 billion less than the MoD budget. and Ministry of Foreign Affairs.
Jeremy Hunt, another former health secretary, has promised tax cuts of over £30 billion, including a cut in corporation tax to 15%. Liz Truss, the Minister of Foreign Affairs, also promised to “cut taxes from day one” by reversing the National Insurance hike and pledging to “keep corporation tax competitive”.
It happens that Sunak, the former chancellor and early frontrunner, has launched a coded attack on rivals offering unrealistic tax and spending plans, describing them as “heartwarming fairy tales” that would end up hanging over future generations.
George Dibb, head of the Center for Economic Justice at the centre-left think tank IPPR, said the plans did not match the needs of families struggling with the soaring cost of living.
“These tax cuts are no longer promised as a way to reduce the cost of living. It’s more of an arms race to convince members of the Conservative Party and it’s totally out of touch with reality.
If the government wants to avoid higher borrowing levels, deep spending cuts would likely be made despite public support for ending austerity and new investment in public services, he said.
“My concern would be that we are already seeing a significant shrinking of the state over the last 12 years of Conservative government through austerity. I don’t think there’s a lot of efficiency to be gained from the system,” he said.