An outsider listening to the debate between Tory leadership contenders might think that the only problem the country is facing is overly burdensome taxes. Never mind the soaring temperatures, a symptom of the climate emergency, or average ambulance waits in England of 51 minutes compared with an 18-minute target. On these topics, those vying to be our next prime minister have had much less to say.
Pledged policies have included cancelling the planned rise in corporation tax or reducing the rate even further; raising income tax thresholds; and more rapid cuts to the basic rate of income tax. With the exception of Rishi Sunak, who has said he would wait before cutting taxes further, the mood music is cutting taxes from day one. We are told this is the best way to get the UK’s economy growing strongly again, therefore putting the country’s finances on a sustainable footing. Tax cuts are also put forward as a way to put money in people’s pockets to help with the cost of living crisis.
But there are several gaping holes in this approach that mean it’s unlikely to survive contact with the UK’s economic reality. Taking the cost of living crisis first, the tax cuts on the table are an incredibly inefficient way of getting money to those who need it. The government has already scheduled a penny cut to the basic rate of income tax, which all candidates support at a minimum. But IPPR analysis shows that this costs the exchequer £5bn, more than half of which will go to the richest fifth of households. It would be much more effective to boost the support offered to those on low incomes through the benefits system.
What about the Conservative belief that taxes hold back economic growth? Inconveniently, there’s little evidence that the only thing standing between the UK and a thriving economic future is slashing taxes on corporate profits. In fact, we’ve tried it for the past decade: the headline rate of corporation tax has been cut successively from 28% in 2010-11 to 19% in 2017-18, but this has not delivered the business investment or economic success promised. The UK remains at the bottom of the pack when it comes to business investment, because businesses invest when they see future opportunities for growth – for example from decent and growing incomes, infrastructure and transport, and a skills policy – not from changes to marginal tax rates.
Perhaps most importantly, permanently cutting taxes has consequences – and would require a scaling back of the state. The problem is, there is nothing left to hack back, following the decade of austerity that people, communities and services across Britain have endured. And, we face huge challenges coming rapidly down the track. We urgently need to decarbonise our homes, our transport and our industries to reach net zero, and to do so fairly. Health services are stretched to breaking point, with many people opting out of the NHS in England as they struggle to access care, and the number needing health services at any one time is only set to grow. Deep economic inequalities between regions and places of the UK – which levelling up was intended to speak to – show no signs of abating and are in some cases deepening.
All of these challenges require more than money to address; but a well-resourced state is essential to tackling each of them. A party determined to engage in a race to the bottom on tax will fail to provide the answers.
This is why several of the candidates have said they would fund tax cuts through borrowing, rather than identifying where they would cut back. Sunak has scathingly referred to this as “something-for-nothing economics”, which would cause inflation. He is half right. The government does have some space for additional spending or tax cuts – but with inflation as high as it is, it will need to use that space wisely, rather than on tax cuts that benefit those at the top without boosting growth. Much better to use it to give direct support to the most vulnerable, increase support with energy costs, and invest in renewable energy and insulation to lower bills today and help hit our net zero targets. To reduce the risk of inflation, tax wealth and income at the top.
In the end, assessing the leadership candidates on their economic plan is like assessing a cat in a dog show. The debates of the past fortnight, and no doubt the coming summer, are designed to score political points, and ultimately to win over just 358 Conservative MPs and 180,000 Conservative party members. But, while tax cuts might delight backbench MPs, Conservative members tend to lean to the centre economically compared with the parliamentary party. Most importantly, the British public are far more concerned about the big issues that need to be addressed than a reduced tax bill. And, unfunded tax cuts with no plan for a stronger economy risks looking fundamentally unserious, and opening up space on economic competence for Labour. To win the next election, the next Conservative leader may find themselves – as many party leaders have done – wanting to move away from policy pledges made in the heat of a leadership contest.
July 19, 2022 at 10:45AM Carys Roberts