Tax plans become clear dividing line in battle for Tory leadership

Rishi Sunak and Liz Truss have taken opposing stances on economy policy, but both will need to offer more direct cost of living support.

26 July 2022

As the face-off between former chancellor Rishi Sunak and Foreign Secretary Liz Truss picks up pace this week, their tax and economic plans have been thrown into sharp relief amid the battle for the keys to 10 Downing Street.

Tax has become the clear dividing line between the pair, with Mr Sunak advocating prudence with the nation’s finances, while Ms Truss is pledging large tax cuts of more than £30 billion.

But both face the conundrum of needing to deliver some sort of extra support this coming winter in the face of a crippling cost of living crisis amid a slowing economic backdrop.

Here we look at the main policies of each candidate and how they stack up in the eyes of some of the UK’s top economists:

Conservative leadership bid
Rishi Sunak and Liz Truss, who have made it through to the final two in the Tory leadership race (PA)

– Rishi Sunak’s plans:

Mr Sunak announced hikes to corporation tax and national insurance before stepping down as chancellor and has stuck to his guns over these, despite storm clouds building over the economy.

He has promised he will eventually cut tax. But the former chancellor is keenly aware of how much he spent during the pandemic to keep the economy afloat.

He now wants to tap households and businesses, many of which would have struggled even more without Government help, to pay for some of these efforts.

Mr Sunak argues that the amount of tax the Government collects needs to rise before it falls. Only “once we’ve gripped inflation” will taxes come down, he has said.

While corporation tax is scheduled to rise next year, he has committed to considering a modest 1% cut in income tax in 2024.

He has so far resisted pressure to bring this forward, but has started to sound more open to lowering taxes in order to start winning the votes.

Allan Monks, an economist at JP Morgan said: “He could balance higher corporation taxes with a more targeted easing for businesses, and bring forward the planned income tax cut to late next year when inflation has fallen.

“This would close some of the gap with Truss.”

In terms of further cost of living support, he has already pledged to lower some business taxes which could result in an overall package closer to the £10 billion to £15 billion he announced in late May.

“Such giveaways are easy to justify fiscally, because they are effective, targeted and have a time limit which means they won’t directly influence the deficit two or three years ahead,” said Mr Monks.

But Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that a Rishi Sunak win would probably only bring “limited” extra help for households this winter.

– Liz Truss’s plans:

While Mr Sunak has held firm over corporation tax and national insurance increases, Ms Truss has vowed to cut these back.

She has promised jam now for Conservative Party members who want to see a cut in their tax bills, but with action to repair the nation’s finances in a few years’ time.

National insurance would be one of her first priorities in Number 10, followed by a cancellation in the corporation tax increase – scheduled for next year – and cuts to green levies on energy bills.

Her plans would be expensive for the Government – the Institute for Fiscal Studies (IFS) estimates a bill of more than £30 billion.

She hopes these cuts can help stimulate growth, so the cost would be lower, but there are fears such cuts could fuel inflation further and lead to even steeper rises in interest rates.

While Mr Sunak’s plans would see the UK return to a corporation tax level it last saw in 2011, Ms Truss would keep the levels that came into force in 2017, under then prime minister Theresa May – one of the lowest rates in the developed world.

It will cost about £17 billion a year if the rise is cancelled, but Ms Truss argues that it would encourage investment, so the cost would be lower.

The IFS agreed to an extent, saying the long-run cost of Ms Truss’s plan would be “considerably lower” than the £17 billion. But, it warned, “the effect would certainly not be big enough for the tax cut to pay for itself.”

Mr Tombs said that Ms Truss would likely have to borrow more money to fund her cuts.

“We doubt that these tax cuts could be even half-funded by spending reductions elsewhere, suggesting that the chances of the Government eventually running a current budget surplus in the mid-2020s, as currently planned, would be remote under a Truss premiership,” he said.

The IFS also said that her green levy plan still needs fleshing out.

Slashing the levy could save households about £150 a year, according to Ofgem forecasts, but while Ms Truss has made the promise, there has been little detail of how the cuts would be made.

The IFS said that the candidate has not said exactly which energy bill levies would be suspended – and what would happen to the subsidies for renewable energy that the levies fund.

“These details would be crucial for assessing the likely effects of the policy; and without them, it is impossible to say how much it would cost,” the IFS said.

(PA Graphics)

Campaigners have also warned against the move – saying it could lead to problems down the line in meeting climate targets.

But with energy bills forecast to hit about £3,300 in October from today’s £1,971 for the average household, people are likely to need more help.

Philip Shaw, chief economist at banking group Investec, argues that “there is little economic justification to cut taxes right now, despite the cost-of-living crisis resulting in an obvious temptation”.

He said that tax cuts would help if the economy was struggling, but “obviously, that is not where we are right now”.

“The use of tax policy to stimulate the economy would be justified if we were about to enter a sharp downturn, perhaps supplementing interest rate cuts,” he said.

“More help will be needed for households but the correct way to approach this would be to concentrate efforts towards assisting lower-income households,” he added.

Mr Monks said some estimates suggest Ms Truss’s plans could end up increasing inflation and therefore lead to more interest rates rises – with some estimates suggesting they could result in up to another half a percentage point on rates.

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