Tory leadership: Do rivals tax pledges add up?on July 12, 2022 at 7:26 am

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Contenders have promised a range of tax cuts but given little detail about how they will be funded.

Downing StreetImage source, Reuters

Promises to cut taxes have become the dominant theme so far of the race to succeed Boris Johnson as Conservative party leader. But how are the plans costed and do they make economic sense?

Under current government plans, the total tax burden is set to reach its highest level since the 1940s, according to official forecasts.

Most of the growing list of Tory leadership candidates are promising to reduce it but haven’t specified whether they would pay for any shortfall in government finances with extra borrowing or cuts to public spending, instead emphasising that they would spur growth and thus increase government revenues.

Corporation tax

This is a direct tax on the annual profits of businesses – essentially, a form of income tax for companies.

The tax rate is currently 19% but from next April – under a decision by former Chancellor Rishi Sunak – it is due to increase to 25%.

Chart showing corporation tax in G7

Who wants to change it?

Sajid Javid – former health secretary and former chancellor – has pledged to cancel next year’s rise and reduce it by 1% a year to 15%.

Jeremy Hunt – former foreign secretary – has gone further, suggesting he would reduce corporation tax to 15% in the autumn budget, due in October.

The newly appointed Chancellor Nadhim Zahawi and Transport Secretary Grant Shapps have promised to scrap next year’s corporation tax rise, while Foreign Secretary Liz Truss said she wanted to “keep corporation tax competitive”.

Economic analysis

The economic think tank, the Institute for Fiscal Studies (IFS), has been crunching the numbers. IFS economist Stuart Adam calculates that:

  • cancelling the rise from 19% to 25% would cost £17bn a year
  • reducing the rate to 15% would cost another £14bn a year

The IFS says though that this potential £31bn annual cost doesn’t allow for whether the corporation tax cut could lead to increased investment in the UK, which could make the final bill “substantially lower – though not enough for the tax cut to pay for itself”.

Income tax

The basic rate of income tax is currently 20p in the pound and is paid on earnings between £12,571 to £50,270.

This rises to 40p in the pound for earnings above £50,270 and 45p in the pound for earnings over £150,000.

Former Chancellor Rishi Sunak announced a reduction in the basic rate to 19p but not until 2024-25.

Rishi Sunak

Image source, Reuters

Who wants to change it?

Sajid Javid and Grant Shapps have both proposed bringing this cut forward.

Mr Shapps says the reduction should happen “now” while Mr Javid would bring it forward by a year.

Nadhim Zahawi wants to go further. He’s announced plans to cut the tax to 19p in 2023 and 18p in 2024. “That will give households back £900 a year on average,” he claims.

Economic analysis

According to IFS economist Stuart Adam, bringing the income tax cut forward to 2023-24 would cost a “one-off” £6bn.

Doing it in 2022-23 would cost another £6bn and “would be harder to implement”.

National Insurance

National Insurance (NI) is a tax on earnings and self-employed profits – paid by all workers, until they reach the state pension age.

Since April, they have been paying more in NI – an extra 1.25p in the pound. The rise – announced by Mr Sunak – was to fund health and social care.

To try to ease the impact of the changes, Mr Sunak raised the threshold – at which people start paying NI – to £12,570. But some of his leadership rivals say this isn’t enough.

Who wants to change it?

Mr Javid, Ms Truss and Tom Tugendhat – chairman of the foreign affairs committee – want to scrap April’s NI rise.

Economic analysis

Reversing the NI rise would cost about £13bn a year, according to the IFS’s Stuart Adam.

Carl Emmerson, deputy director of the IFS, said cuts to personal taxes such as NI “certainly won’t be paying for themselves”. He said while such tax cuts would put “more money in people’s pockets”, they risked contributing to inflation.

Woman filling up car at petrol pump

Image source, Getty Images

Fuel duty

This is a tax – along with VAT – included in the price of petrol, diesel and other types of fuel.

It’s a significant source of income for the government. In the 2022-23 financial year, the Office for Budget Responsibility expects the tax to raise £26.2bn in revenue.

But the price of fuel has increased dramatically in the UK – following the war in Ukraine – and has added to the cost of living pressures.

Graphic showing what makes up the cost of petrol

UK fuel duty is currently 52.95 pence per litre for petrol and diesel. In the 2022 Spring Statement, the government cut fuel duty by five pence per litre.

Who wants to change it?

Sajid Javid has pledged to cut fuel duty by 10p per litre “within days” of becoming Conservative leader and Trade Minister Penny Mordaunt said she would cut VAT on fuel in half, from 20% to 10%.

Penny Mordaunt

Image source, Reuters

Mr Tugendhat has said he would reduce fuel taxes but has not said by how much.

Economic analysis

Following the 5p reduction to fuel duty, Caroline Mullen and Greg Marsden, transport researchers from Liverpool University, claimed that cutting fuel duty would only benefit the wealthiest in society.

“In 2019, the highest income group in the UK drove an average of 4,893 miles per year, more than three times that of the lowest income group.

“If it is the least well off that the fuel duty cut is aimed at protecting, then the tax system or benefit adjustments would surely be more targeted and effective,” they said.

VAT on energy bills

VAT is payable on goods and services. The standard rate is 20% but VAT on domestic energy bills is currently 5%.

When the UK was a member of the EU, this could not be reduced further. During the 2016 EU referendum campaign, Boris Johnson and Michael Gove said that “when we Vote Leave, we will be able to scrap this unfair and damaging tax”. But this has not happened.

Who’s proposing what?

Suella Braverman has called for VAT on energy bills to be cut further.

Suella Braverman

Image source, PA Media

Economic analysis

Getting rid of the 5% tax would cost the government about £1.7bn a year, according to HMRC estimates.

What about the other candidates?

Former Chancellor Rishi Sunak hasn’t announced the details of his tax policies yet. In his campaign video, he has warned against “fairy tales that might make us feel better in the moment, but will leave our children worse off tomorrow”.

Both Kemi Badenoch and Rehman Chishti have said they want “lower taxes” but have not specified where the taxes they would cut.

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