Save content
Have you found this content useful? Use the button above to save it to your profile.
Hot air
iStock_xurzon_hot

Are promises of tax cuts any more than hot air?

by

What will the promised tax cuts from Conservative leadership contenders actually achieve once the winner becomes prime minister?

20th Jul 2022
Save content
Have you found this content useful? Use the button above to save it to your profile.

This has been a week of hot air, both in the atmosphere and politics, making anyone lucky enough to work in an air-conditioned office very happy.

Accountants are always heartened when the mainstream media turns its attention to taxes, so many of us will have been walking around with broad smiles for the past week or two, since any change means extra work.

For most, it would have been enough to discover that serious questions are being raised about the tax affairs of this week’s Chancellor of the Exchequer, Nadhim Zahawi, a non-dom for much of his life if ever there was one. It is a sad fact of life in today’s prurient society that if you put yourself up for high political office someone is going to poke into your tax affairs. Having agreed to become Chancellor, Mr Z now finds himself in the spotlight.

Biscuit taking

When it comes to truth telling, the caretaker prime minister takes the biscuit. Without wishing to crow and say “I told you so”, at the time of his election in 2016 this column raised the alarm, expressing concern about the prospect of the UK finding itself saddled with a leader who even his best friends now claim, rather than being dishonest, is merely delusional.

The upshot of Johnson’s impending demise is a leadership battle (there is no other word) that has become increasingly unpleasant as each of the candidates took pot shots at their fellows. This will come back to haunt whoever becomes the new prime minister when the gleeful shadow front bench uses the weaponry provided in earnest by his or her own side.

It appears that one thing the last handful of candidates learned from dear BJ was that the way to the top is paved with economical truths.

Anyone who, with the benefit of hindsight, looks again at the promises made to justify leaving Europe will see little but fantasies, in other words, barefaced lies. You have to wonder whether some of the efforts of the contenders to take his place are much more credible, especially when it comes to cutting taxes.

Loose grasp of economics

We all know that in a former life Liz Truss was a management accountant but her loose grasp of economics and taxes makes one wonder whether she was a good one, since her proposals all seem to consist of one-sided entries. Like all of her frivals, bar Rishi Sunak, she seems to believe that cutting taxes but promising additional spending will solve all of life’s problems.

To use a quick analogy, if a client comes to you and explains that they have maxed out three credit cards and cannot pay the interest, would you really recommend that they apply for a couple more at a time when interest rates are soaring?

The cynical might wonder whether the plan is to promise tax cuts in order to become the key holder at 10 Downing Street, then ditch the policy and rely on the short memories of the voting public.

Economic implications

Rishi Sunak is the only person in the leadership race who shows any great understanding of the economic implications of cutting taxes at this point in the economic cycle, but he has his own baggage. He makes the far more plausible promise of doing so at some indefinable point in the future. This is the kind of promise that he knows will be forgotten and explains why he appears to be the most astute of an unimposing bunch.

Sunak has also developed a carefully calibrated but highly effective tax-cutting strategy. This is to raise taxes by, let us say 6%, then, just before an election, reduce them by 3% and claim that you are a superhero.

If he finally gets to move next door, then this is a good bet for corporation tax, zooming up to 25% then magically reigning back to 22% when re-election looms.

He also has a better handle on utilising tax breaks to benefit the economy and this is critical. The major issue holding Britain back must surely be productivity and investment. We seem to be completely unable to do anything about the former but can encourage investment by offering major tax incentives to companies and individuals that are willing to spend for future growth.

Considering the impact

There is another problem. You might imagine that any forward-thinking politician would be considering the impact of proposed policies on the 35m prospective voters in the next general election. This would require serious investment in levelling up and incentives that benefit the millions at or near the bottom of the economic pile.

However, short termism being the flavour of the month, the ever-dwindling team of contestants has been more interested in the ways that tax cuts, pension increases and so on will help the prospects for a few hundred MPs and then the 160,000 Conservative party members who get to choose our next leader – a very different demographic.

It is worth repeating that if they really want to bring in serious tax revenues without risking spiralling inflation, boosting the HMRC’s investigative divisions, chasing fraudsters and miscreants then “getting tax done” would be far more sensible than offering vague promises you have no intention of keeping.

If anyone reading this article can identify wonderful opportunities resulting from unfunded tax cuts they might like to enlighten us.

Replies (4)

Please login or register to join the discussion.

avatar
By Paul Crowley
20th Jul 2022 12:40

The debates were an embarrassment
No surprise that debate 3 was cancelled on orders of party
All questions were antagonistic from people not voting in this ballot.
A waste of airspace

Thanks (2)
avatar
By AndyC555
20th Jul 2022 18:46

"Anyone who, with the benefit of hindsight, looks again at the promises made to justify leaving Europe* will see little but fantasies, in other words, barefaced lies."

I was promised the hilarious prospect that remainiacs would continue to impotently and churlishly whine about Brexit long after a democratic vote to leave the EU.

That promise was true.

*Last time I checked a map, the UK was still just as much a part of Europe as it had ever been.

Thanks (1)
By ireallyshouldknowthisbut
21st Jul 2022 08:53

Given the massive fiscal drag currently being caused by the failure to uplift any allowances by inflation (some for many years, eg £100k loss of personal allowance) it seemed to be a well telegraphed move that the 'tax cuts' would merely be putting back where we ought to have been had allowances been moving in step with inflation. And gouging extra taxes for two years in the middle.

Thanks (0)
avatar
By vstrad
25th Jul 2022 13:14

A rather nasty, mean-spirited piece, Philip. The notion of paying for tax cuts is hardly applicable if the tax increases you plan to reverse were not necessary in the first place.
Truss has some very well-respected economists in her corner, as it happens.
https://www.telegraph.co.uk/business/2022/07/24/hand-wringing-establishm...

Thanks (1)