Are Tax Cuts In Favor Of The UK?

Rishi Sunak, the former Chancellor of the Excheque born to parents of Indian descent who emigrated from East Africa to the UK, and Secretary of State for Foreign, Commonwealth, and Development Affairs, Liz Truss, have both led all election rounds to succeed the former British Prime Minister Boris Johnson since its launch on July 12.


Sunak has won the support of many Conservative MPs who aspire to retrieve conservative fiscal policies following years of unprecedented government spending as a response to the Corona pandemic crisis and is a leading supporter of Brexit which he believes that the Brexit attributes to Britain's ability to regain control of its borders.


Unlike his rivals, Sunak used to be against tax cuts as he believes that it is more important to tackle the Kingdom's record inflation levels. In his resignation letter, Sunak wrote, " Our people know that if something is too good to be true then it's not true." However, he recently stated that if he wins, he would eliminate VAT on local energy bills for the coming year, contrary to what he believed that it was a move in favor of wealthy families beyond poor families.  He said that he would only cut taxes when public finances were strengthened, noting that the cuts might not come until autumn 2023. Sunak was accused of changing sides by many including his counterpart Liz Truss, Thérèse Anne Coffey, the Secretary of State for Work and Pensions, Kwasi Kwarteng, the Secretary of State for Business, Energy and Industrial Strategy, and Pat McFadden, the Shadow Chief Secretary to the Treasury.


Liz Truss, who was one of the most prominent opponents of Brexit, is also in favor of tax cuts. Patrick Minford, Liz’s Economic Strategist, has told the Time Magazine that tax cuts would boost the economy, and interest rates are likely to rise to a more "normal" level of about 7%. This is well above the Bank of England's current benchmark lending rate, which now stands at 1.25%, the highest level since 2009.


Tax cuts increase aggregate demand and hence increase inflation further; therefore, the Bank of England would increase interest rates, eliminating any potential boost to the economy, but if the tax cut is met with a similar cut in government spending, inflationary pressures might not rise. The pledges represent another departure from the era of fiscal control - or austerity - that was once a prominent characteristic of the Conservative Party as the pandemic spurred a historic surge in spending and debt. Even Prime Minister Boris Johnson recently rejected immediate tax cuts as annual UK inflation rose to 9.4% in June 2022, the highest rate since 1982 and higher than market expectations of 9.3%. Britain is facing a debt burden of more than three times its current level unless future governments raise taxes to finance rising costs and lower revenues from car fuel taxes.


The British Office for Budget Responsibility (OBR) also said that debt is expected to reach more than 320% of GDP within 50 years, up from 96% or $2.9 trillion today, if successive governments fail to tighten fiscal policy. In addition, the OBR commented, "Aging population pressures on spending and the loss of current car taxes in a carbon-free economy leave public debt on an unsustainable long-term path." Candidates are under considerable pressure as the UK's GDP growth rate is expected to drop from 3.6% to 0% by 2023, the lowest amongst the G7, according to OECD projections, and the following table shows estimates for some countries.


Source: House of Commons Library, July 2022



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