Leading economists, two former Conservative chancellors and the former head of the Treasury turned on Tory leadership rivals yesterday, accusing them of unwisely promising billions of pounds in unfunded tax cuts.
Tax has emerged as the key dividing line between Rishi Sunak, the early frontrunner, and his rivals, who have competed to offer cuts costing tens of billions of pounds. Sunak’s team accused them of “fantasy tax cuts”, but rival camps say his economic plan makes no sense.
Sajid Javid, the former health secretary, has pledged to scrap April’s national insurance rise to increase funding for the NHS and social care and cut fuel duty by 10p a litre as part of a £40 billion tax reduction package.
Best of TimesWe’ll send you our top stories, across all sections, straight to your inbox. Simple as that.One-click sign up.
The chancellor, Nadhim Zahawi, has unveiled his own £36 billion package including cutting the basic rate of income tax to 18p and scrapping VAT and green levies on energy bills.
Liz Truss, the foreign secretary, has promised to scrap the national insurance rise and reduce taxes “from day one”, hinting at cuts to corporation tax.
Jeremy Hunt wants to cut corporation tax to 15p, instead of raising it to 25p as planned, while Penny Mordaunt wants to raise higher-rate tax thresholds and halve VAT on petrol and diesel. Tom Tugendhat has said he would reverse national insurance rises and cut the cost of fuel.
But the largesse has been broadly criticised by economists and former Tory chancellors who have warned that the giveaways risk fuelling inflation and adding to the UK’s already record debt burden. Philip Hammond, chancellor under Theresa May, told The Times that the party would never regain the trust of the public by being dishonest with them over tax.
“When the problem is inflation then the last thing you want to do is stoke demand,” he said. “The Conservative Party cannot regain the trust of the British people if the candidates in its leadership race are simply competing to make tax and spending promises that can only be funded through printing money.”
Writing in The Times today the former Tory leader Lord Hague of Richmond said the promises were a hostage to fortune that would undermine the party’s “priceless reputation for disciplined economic management”. He said: “MPs need to ask themselves whether it is economically rational to become locked into other tax cuts on top of these before knowing how high inflation, a recession, or both, will take shape.”
He was backed by Sir John Major’s former chancellor, Lord Lamont of Lerwick, who feared the leadership election would descend into a “Dutch auction of tax cuts” that were unaffordable.
“The government have been warned by the OBR [Office for Budget Responsibility] that debt could spiral upwards from 100 per cent of GDP to eventually double that if we don’t have tight control of our finances,” Lamont, who is backing Sunak, told the BBC.
“I’m all in favour of people putting forward tax cuts, if they say where they’re going to find the money.”
Lord Macpherson of Earl’s Court, a former Treasury permanent secretary, suggested the Tory tax plans put Britain on course for Turkish levels of inflation, which reached almost 80 per cent last month.
“There may well be an alternative to Mr Sunak’s prospectus for the economy. But so far his rivals are not inspiring confidence. Less the heirs to Margaret Thatcher; more the disciples of Recep Erdogan”, he said.
Torsten Bell, chief executive of the economic think tank the Resolution Foundation, said: “Having just lost a prime minister who left office because he was not totally straight with the public, we are at risk of starting the campaign to succeed him with candidates not being straight about tax.
“There is a trade-off with any tax cut between borrowing and public services but this is not being acknowledged.
“Also tax policy is being asked to do too much work — both combating the cost of living crisis and promoting growth . . . you cannot plausibly expect tax policy to do too much in either area.”
Paul Johnson, director of the Institute for Fiscal Studies, added that with inflation heading towards 10 per cent, any immediate tax cuts “might have some small effect in the wrong direction” on the economy.
“If you’re looking at big tax cuts funded by borrowing in the short run, then that might have some small effect in the wrong direction on inflation, or may result in the Bank of England increasing interest rates a little bit further and a little bit faster than they otherwise would have done.”
Read more:
Finance experts and past chancellors attack Tory leadership challengers’ race to slash taxes