The economy is set to be a key issue in the race to become the next prime minister, and a dividing line is already emerging between candidates focused on preserving the Johnson government’s approach to investing in public services and those who want to pursue reform of the supply. Rishi Sunak, the former chancellor and current front-runner, launched a coded attack on the Tories by putting forward unrealistic pledges, which he described as “comforting fairy tales”. In the video that launched his campaign, he asked: “Are we facing this moment with honesty, seriousness and determination?” Sunak has yet to present 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, strengthen our economy and cut taxes. He wants to use the new freedoms that Brexit has given us, and the new mindset it can give us, to unleash growth.” However, several other candidates are proposing a significant departure from Mr Sunak’s policies, notably former health secretaries Sajid Javid and Jeremy Hunt and foreign secretary Liz Truss. Others, including Chancellor Nadhim Zahawi, Foreign Affairs Select Committee Chairman Tom Tugendhat and Attorney General Suella Braverman, have talked about the need to cut taxes but have not drawn up plans. The tax cut pledges are designed to appeal to the 358 Tory MPs who will begin selecting a shortlist on Wednesday before the final two candidates are voted on by party members. Research by the UK think tank In A Changing Europe shows Conservative MPs are significantly to the right of Tory party members on economic issues such as inequality and taxes, and further to the right of voters. Paul Johnson, director of the Institute for Fiscal Studies think tank, said the scale of pledges from many of the candidates would not be straightforward to fund. “Everyone would like lower taxes but [the candidates] we need to be clear about the consequences,” he said. He added that contenders will face two difficult choices. “Using this margin in tax cuts almost certainly means big cuts in real terms to public wages,” he said. “An alternative of course is to borrow more, contrary to the Conservative manifesto. It can be dangerous in a high inflation environment.” An analysis by the Financial Times of the leading candidates’ pledges shows how much each would cost. Javid, whose promises will cost £49.4 billion, has adopted 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 planned to raise the interest rate from 19 to 25 percent next April. The cost of a corporation tax rate of 15 per cent compared to a rate of 25 per cent would be £34 billion a year, according to HM Revenue & Customs’ ready calculation tables, which give an estimate of the overall cost of the tax cuts.
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Javid has also pledged to reverse the government’s planned rise in national insurance, which will draw in £18bn a year by 2025-26, although the cost would be lower – £13bn a year by 2025-26 – if reversed also the increased threshold for paying contributions. His other proposals include bringing forward the income tax cut planned for 2024 to next year, costing £6bn a year until 2024-25, and further cuts to fuel taxes, costing £2.4bn for each reduction of the tax of 5 p. on a liter of petrol or diesel. Assuming the fuel tax and income tax proposals are temporary, the total cost of the Javid package will be between £47bn and £52bn a year, or around 2 per cent of GDP. In an interview with the Sunday Telegraph, Javid defended his approach. “There are some who say you can’t have tax cuts until you have growth. I think this is wrong. I think this is a fundamentally flawed analysis. I think you can’t have growth until you get the tax cuts,” he said. Hunt fell short of Javid, with proposals costing £39bn. They included an immediate cut in corporation tax to 15 per cent, at a cost of £34 billion, alongside a five-year holiday on business rates in the most deprived areas of the country. The cost of this would be determined by how the areas were included. A Hunt ally said his tax cut plan would “unleash the growth that has been missing from our economy for a long time: Ireland’s big corporation tax cuts in the 1990s created the Celtic Tiger economy”. Jeremy’s will do the same for the UK.” But cutting corporation tax to 15 percent – the effective average rate after allowances are taken into account – would put the UK in breach of new minimum global corporate tax rules agreed by the OECD. This would allow other countries to collect the tax revenue gained from profits made in the UK, effectively removing any incentive for foreign investment from lower interest rates, while losing money to the exchequer. Dan Niedel, founder of the Tax Policy Associates think tank, said UK tax cuts would be “completely pointless” because London would “give up tax revenue to other countries”. The Trust has yet to promise cuts to corporation tax, but has promised to reverse the government’s rise in national insurance, which will cost between £13bn and £18bn a year by 2025-26, depending on whether payment thresholds are also reversed. A Truss ally said her pitch would “offer a departure for the economy. It will do a quick and smart spending review, among other things. Liz’s second and third priorities are economic development. She would be bold about reforming the supply, which Tory governments have promised for a long time, but Liz would.’
