Tax cut pledges by Tory leadership hopefuls ‘risk stoking inflation and inequality’ | Tax and spending

The scale of tax cuts promised by Conservative leadership hopefuls would blow a hole in the public finances and could lead to rampant inflation, Tory opponents and economists have warned.

Nadhim Zahawi, who took over as chancellor last week, used a leadership speech on Monday to announce tax policies that would cost an estimated £50bn a year, almost as much as the combined budgets of the Ministry of Defence and Foreign Office.

Sajid Javid, the former health secretary, who also served as chancellor, launched his leadership bid with tax cuts he said would cost about £40bn a year, including a reduction to income tax, scrapping the recent rise in national insurance, and a temporary 10p a litre extra cut in fuel tax.

Of the 11 candidates vying to become the new prime minister, almost all have made lavish pledges to reduce the tax rate and shrink the state, with costings generally left vague.

The pound has fallen to the lowest level in two years in recent weeks amid growing concern over the strength of the British economy and political instability during an intense squeeze on households and businesses.

Economists said the proposals would risk stoking inflation and inequality, while adding to government borrowing or requiring sweeping spending cuts. Rishi Sunak’s camp believes some of the promises would lead to a fiscal black hole amounting to tens of billions of pounds.

Nick Macpherson, the former top Treasury mandarin, said the candidates were showing themselves to be “less the heirs to Margaret Thatcher; more the disciples of Recep Erdoğan”, referring to the Turkish president’s economic policies, which have been blamed for contributing to inflation hitting almost 80%.

Gavin Barwell, a Conservative peer who was Theresa May’s chief aide, said the leadership candidates risked telling the Conservative party “what it wants to hear”, and not the truth.

“You can’t have Thatcher levels of taxation and Johnson levels of public spending – particularly given the damage Brexit has done to economy and increased demand for public services post-Covid,” Barwell tweeted.

Labour said multibillion-pound pledges had been “casually tossed on to the pages of the newspapers” in a matter of days.

Pat McFadden, the shadow chief secretary to the Treasury, said: “Tax cuts have to be sustainable. They can’t just be plucked out of the air. They claim to be able to fund these through efficiencies or cuts in civil servants. Next it will be the tooth fairy. If Labour were making promises like this, we’d be getting killed for it.”

A series of candidates have said they would scrap a planned increase in corporation tax due next April from 19% to 25%, with Javid promising to cut the headline rate to 15% over time.

According to HMRC’s ready reckoner tables, which provide rough estimates for the cost of tax changes, a 10-percentage-point reduction would cost £32bn a year by the end of the current parliament in 2024-25.

Another candidate, the attorney general, Suella Braverman, used her speech on Monday to say much public spending could be replaced by a greater role for families and communities.

Zahawi promised to cut income tax by 2p by 2024, scrap the corporation tax rise and scrap VAT and green levies on fuel for two years. The former education secretary said his plans could be paid for by cutting the number of civil servants by 20%, although this is estimated to save less than a tenth of the cost of his proposed tax cuts.

On Zahawi’s pledges, Torsten Bell, the head of the Resolution Foundation thinktank, calculated that the changes to income tax, energy bills and corporation tax would total £50bn a year by 2024. This is only £5bn less than the budget for the defence ministry and Foreign Office.

Jeremy Hunt, another former health secretary, has promised tax cuts worth more than £30bn, including a reduction in corporation tax to 15%. Liz Truss, the foreign secretary, has also pledged to “cut taxes from day one” by reversing the national insurance rise and promising to “keep corporation tax competitive”.

It comes Sunak, the former chancellor and early frontrunner, launched a coded attack on rivals offering unrealistic tax and spending plans, describing them as “comforting fairy tales” that would ultimately burden future generations.

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George Dibb, head of the Centre for Economic Justice at the centre-left IPPR thinktank, said the plans did not match the needs of families struggling with the soaring cost of living.

“These tax cuts are no longer being promised as a way of addressing cost of living. It’s more of an arms race to win over Conservative party members and its totally divorced from reality.”

If the government wants to avoid higher borrowing levels, steep spending cuts would probably be made despite public support for ending austerity and fresh investment in public services, he said.

“My concern would be we’re seeing a significant shrinkage of the state already over the past 12 years of Conservative government through austerity. I don’t think there’s much efficiency to squeeze out of the system,” he said.

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