The difference between the tax plans of the Conservative candidates? One is bad, the other is really bad | Larry Elliot

RIshi Sunak is losing the battle to become Britain’s next prime minister and he knows it. The former Chancellor’s announcement that he would scrap VAT on energy bills for a year is exactly what it sounds like: a reversal born of desperation.

After establishing himself as the candidate for sober rectitude, Sunak bowed to the inevitable as opinion polls show Liz Truss’ plan for immediate tax cuts proving more attractive to members of the Conservative Party than its wait-and-see approach.

Let’s be clear. Judging from their campaigns so far, neither Sunak nor Truss have the first idea of ​​what to do about the UK’s deep-rooted economic problems. But Truss — more luck than judgment perhaps — is on to something when she says Sunak’s previous tax rulings are making a bad situation worse.

Some economists think Britain is already in recession, others that the country is still on the brink. One thing is certain: Gazprom’s decision to restrict gas supplies to Europe via the Nord Stream 1 gas pipeline has amplified this threat. The International Monetary Fund (IMF) said this week that a sudden Russian energy shutdown was one of the things that could turn a sharp slowdown in the global economy into something far more serious. This recession risk seems to be materializing, and although Britain is not dependent on Russian gas, it will still be affected by soaring global gas prices.

It now looks like the energy price cap will rise from just under £2,000 a year to at least £3,300 a year – and possibly even more – in October, pushing the annual inflation rate two digits. The IMF already expects Britain’s economy to come to a standstill by the end of this year and see the slowest growth of the G7 group of major industrial nations in 2023.

Higher inflation is bound to trigger a response from the Bank of England. Interest rates have been raised at the last five meetings of the Bank’s Monetary Policy Committee (MPC) and official borrowing costs will rise again next week. So far the MPC has favored cautious increases of 0.25 percentage points, but there is every chance of a 0.5 point jump this time. The risks of exaggeration are high as the Bank will continue to tighten policy until it is confident that higher prices are not translating into higher wages and inflation is heading towards its target of 2 %.

Meanwhile, the Treasury’s obsession with balancing the books means it is also weighing on growth. National Insurance (NIC) contributions increased in April, income tax thresholds are frozen for three years and corporation tax will rise from 19% to 25% next year. As a share of the economy, taxes this year will be at their highest level since 1950-1.

The risk here is obvious. If the Bank of England sucks the purchasing power of the economy through higher interest rates at the same time as the Treasury does the same through higher taxes, then the risks of recession increase, especially when the economy is already weakening.

Sunak gave two reasons for his tax increases. The first is that high levels of debt and borrowing mean the UK has maxed out its credit card. This, however, suggests that there is no difference between the finances of a household and the finances of the state, when this is not the case. States that can print their own currency do not go bankrupt. The national credit card does not exist and it makes sense for the government to spend more when the rest of the economy is weak.

The second argument is that the tax cuts proposed by Truss – the cancellation of the NIC increase and the removal of the proposed corporate tax hike – would lead to even greater inflationary pressure and thus to significantly higher interest rates from the Bank of England.

It also doesn’t stand up to serious scrutiny. Truss’ £30billion package is a relatively small beer in the context of a £2billion-plus economy, and more than half the cost would come from not going ahead with it the increase in corporate tax. The increase in consumer spending potential would be modest, and even under Prime Minister Truss taxes would still be at their 70-year high. Interest rates may be a bit higher than they otherwise would be.

A better criticism of the Truss tax plan is that it does very little for those hardest hit by spiraling energy costs. As the Resolution Foundation pointed out, only 15% of the benefits of reversing the increase in NICs would go to the poorest half of the population, compared to 28% to the richest 20%. The average increase in income in London would be more than double that of the North East of England or Wales.

Clearly, their proposed tax cuts – whether now or later – are by no means a solution to the worsening cost of living crisis and further aid will be needed to help households get through Winter. It would make more sense to target help to those most in need through the benefit system rather than offering tax cuts that favor the wealthiest.

However, that is not the choice for those tasked with choosing Boris Johnson’s successor. They have a choice between Truss’ bad plan and Sunak’s very bad plan. As it stands, they seem to be opting for the former.

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