Hours after the Conservative Party leadership bids opened following Boris Johnson’s resignation, some candidates have promised sweeping tax cuts that threaten to leave a black hole in the UK’s finances.
The economy is shaping up to be a defining issue in the race to become the next prime minister, and a dividing line is already emerging between contenders focused on maintaining the Johnson government’s approach to investing in public services and those willing to pursue supply-side reform.
Rishi Sunak, the former chancellor and current front-runner, launched a coded attack on the Tories, making unrealistic promises that he described as “comfort talk”. In the video launching his campaign, he asked: “Are we meeting this moment with honesty, seriousness and determination?”
Sunak has yet to set out his full economic platform, but is expected to argue that when he was chancellor his approach was responsible. His campaign said: “He will tackle inflation, grow our economy and cut taxes. He wants to use the newfound freedoms Brexit has given us and the new mentality it can give us to unleash growth.
But several other contenders offer a significant departure from Sunak’s policies, notably former health secretaries Sajid Javid and Jeremy Hunt and foreign secretary Liz Truss.
Others, such as Chancellor Nadhim Zahawi, Foreign Affairs Committee Chairman Tom Tugendhat and Attorney General Suella Braverman, have talked about the need for tax cuts but have not laid out plans.
The tax cut promises are intended to appeal to the 358 Tory MPs, who will begin choosing a shortlist of candidates on Wednesday before the final two contenders are voted on by party members.
Research by the UK’s Changing Europe think tank suggests Conservative MPs are significantly to the right of Tory members on economic issues such as inequality and tax, and further to the right of voters.
Paul Johnson, director of the Institute for Fiscal Studies think tank, said the scale of the pledges by several of the candidates would not be easy to finance. “Everyone would like lower taxes, but [the candidates] the consequences should be clear,” he said.
He added that the contenders would be faced with two difficult choices. “Taking this opportunity to cut taxes almost certainly means big real cuts to public wages,” he said. “The alternative, of course, is to borrow more, contrary to the Conservative manifesto. It can be risky in a highly inflationary environment.”
A Financial Times analysis of the leading candidates’ pledges shows how much each would cost.
Javid, whose promises will cost £49.4bn, has accepted the most expensive set of tax cuts of any candidate so far. The former chancellor is proposing to cut the corporate tax rate by 1 percentage point a year until it reaches 15 per cent.
As chancellor, Sunak plans to raise the interest rate from 19 to 25 percent next April.
The cost of a 15 per cent corporation tax rate compared to a 25 per cent rate would be £34bn a year, according to HM Revenue & Customs ready tables which estimate the total cost of the tax cuts.
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Javid has also promised to scrap the government’s planned increase in National Insurance, which will raise £18bn a year by 2025-26, although the cost will be lower – £13bn a year by 2025-26 – if he also canceled the increased threshold for payment of installments.
His other proposals include bringing forward the income tax cut planned for 2024 to next year, costing £6 billion a year until 2024-25, and further cuts in fuel duty, which will cost 2 £.4bn for every 5p reduction in duty per liter of petrol or diesel.
Assuming the fuel tax and income tax proposals are temporary, the total cost of the Javid package would be between £47bn and £52bn a year, or around 2 per cent 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 get growth. I think this is wrong. I think this is a fundamentally flawed analysis. I think you can’t have growth until you cut taxes,” he said.
Hunt did not go as far as Javid, with proposals worth £39bn. These included an immediate cut in corporation tax to 15 per cent, costing £34bn, along with a five-year holiday on business rates in the most deprived parts of the country. The cost of this will be determined by how the areas are included.
A Hunt ally said his tax cut plan would “unleash the growth our economy has lacked for too long: Ireland’s big corporation tax cuts in the 1990s created the Celtic Tiger economy; Jeremy’s will do the same for the UK”.
However, cutting corporation tax to 15 percent – the effective average rate after allowances are taken into account – would leave the UK in breach of the new OECD-agreed minimum global corporate tax rules. This would allow other countries to collect the tax revenue earned on profits made in the UK, effectively eliminating any incentive for foreign investment from the lower rates, while also losing money to the exchequer.
Dan Needell, founder of the Tax Policy Associates think tank, said UK tax cuts would be “completely pointless” as London would “hand over tax revenue to other countries”.
Truss has yet to promise a cut in corporation tax, but has pledged to scrap the government’s National Insurance increase, which will cost between £13bn and £18bn a year by 2025-26, depending on whether payment thresholds also have been reversed.
One Truss ally said her proposal would “offer a diversion to the economy. It will do a quick and smart review of expenses, among other things. Liz’s second and third priorities are economic growth. She will be bold on supply-side reform, which is something Tory governments have been promising for a long time, but Liz will deliver.
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