By Jessica Frank-Keyes
Rishi Sunak’s mooted plans to reduce the tax burden from a seven-decade high with a 2p cut in income tax ahead of the next election have been welcomed by Tory campaigners.
Reports surfaced in the Sunday Telegraph that the PM – an ex-City banker – is keen to cut charges in order to incentivise work and wants to head into the campaign “promising more”.
Whilst Tory thinktanks welcomed the news, economists at the Institute for Fiscal Studies (IFS) have suggested the prime minister’s proposals to slash National Insurance (NI) or income tax may not come to fruition due to fears over inflation and the public finances.
Officials are said to be investigating the impact and length of current inflation levels, while some have privately admitted economic recovery is likely to be strong enough by early next year for Sunak to announce a cut in the spring statement, it was reported.
While Conservative Growth Group MPs, including Liz Truss ally Ranil Jayawardena, urged the PM to deliver more cuts to stamp duty to aid first-time buyers onto the property ladder.
‘Permanent’ tax cuts?
It comes just days after the International Monetary Fund (IMF) warned ministers against tax cuts, which they said risk fuelling inflation and sparking lasting high interest rates.
Boffins at the Washington-based body urged Chancellor Jeremy Hunt to stick to plans to shrink public spending and use any surpluses to pay down debt and “rebuild fiscal buffers”.
Carl Emmerson, IFS deputy director, told CityA.M.: “While we may see new tax cuts announced before the general election it is questionable whether they will prove permanent.
“The Chancellor’s commitment to stabilise debt already implies a further squeeze on the budgets of some spending departments, which may not be implemented.”
He added: “While a 2p cut off the basic income tax rate would be substantial – reducing revenues by about £14bn a year – it would offset less than half the £30bn now expected to be raised from the multi-year freeze to personal tax thresholds announced by Sunak and extended by Hunt.”
‘Can’t come soon enough’
Ryan Shorthouse, chief executive of Conservative thinktank BrightBlue, said government was “right to focus on cutting taxes on income from work” and stressed that “the weight of taxation in this country is on work and working-aged people”.
He added: “The most targeted way of cutting taxes on income from work would be raising the personal allowance for income tax and the primary threshold for NI.
“The government could choose to go quicker or deeper on cutting taxes on work by raising taxes on income from assets, such as property, dividends and capital gains.”
John O’Connell, from the Taxpayers’ Alliance, welcomed the proposals, saying: “With taxation running at record levels, tax cuts can’t come soon enough.
“Instead of waiting for a general election giveaway, ministers should get on with meaningful tax cuts now.”
But Labour peer and economics professor Lord Prem Sikka branded the idea a “bribe”, and wrote on Twitter: “[It] won’t do anything for 21m adults on incomes of less than £12,570… [it] won’t change regressive policies – capital gains, dividends taxed at lower rates than wages.”
A HMT spokesperson said: “We don’t comment on speculation about tax changes outside of fiscal events.”
No10 and Labour’s shadow treasury team were contacted for comment.
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