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What could be the impacts of possible tax cuts?

·4-min read

The debate around promises of tax cuts has intensified as Conservative leadership contender Rishi Sunak has said it is “not credible to promise lots more spending and lower taxes”, in a swipe at rivals.

Here is a look at what some contenders have said and the debate about what the impact of tax cuts could potentially have:

– What have some Conservative leadership hopefuls said about taxes?

Former chancellor Mr Sunak said he would only cut taxes “once we’ve gripped inflation”.

Chancellor Nadhim Zahawi has pledged to cut income tax in 2023 and 2024 and abolish green levies on energy bills for two years, while Foreign Secretary Liz Truss vowed to cut taxes “from day one”.

Mr Zahawi has said cutting tax is a critical step to tackle the cost-of-living crisis.

Jeremy Hunt, who has been both health and foreign secretary, told BBC Breakfast he wants to “cut all taxes”.

Tom Tugendhat has said he would reverse a rise in national insurance.

Mr Tugendhat, a former soldier, has also said: “Tax cuts cannot be the only round in the magazine to fire growth in the economy.”

– What could be the case for cutting taxes?

They may bring some further relief, with the pressure on household finances set to intensify in the coming months as bills soar higher.

According to energy consultancy Cornwall Insight, bills could rise from the current record of £1,971 to £3,245 in October and then further to £3,364 at the start of next year.

The forecasts are based on what an average household will spend on gas and electricity in a year.

While the national insurance (NI) starting threshold was raised in July, giving people a boost in this month’s pay packets, there has already been a controversial 1.25 percentage point increase to NI in April to help pay for health and social care.

Many people have also been pushed into higher tax bands in recent years as bands have remained frozen while wages have increased.

– What could the drawbacks of cutting taxes be?

While there may be some short-term gain from cutting taxes, there may also be long-lasting pain, according to some.

Some claim that tax cuts could add to upward pressures on inflation, which is already expected to hit double digits later this year, and lead to a weaker pound.

And the Office for Budget Responsibility (OBR) recently suggested that tax increases are needed to offset rising cost pressures.

The OBR predicts debt could rise from 96% currently to more than 100% of GDP by 2052-53 and reach 267% of GDP in 50 years if upward pressures on health, pensions and social care spending, and the loss of motoring taxes, are factored in.

The OBR said bringing debt back to 75% of GDP, the level at which it stabilised in the Government’s pre-pandemic March 2020 Budget, “would need taxes to rise, spending to fall, or a combination of both”.

The OBR said the reversal of tax increases announced by former chancellor Mr Sunak would “put more pressure” on creaking public finances.

MONEY NationalInsurance
(PA Graphics)

– What have others in political life said about tax?

Some have questioned where the money for tax cuts would be found.

Conservative former chancellor Lord Lamont, a supporter of Mr Sunak, said on Radio 4’s World at One programme this week he is increasingly concerned about a danger “that this leadership election is going to descend into a sort of Dutch auction of tax cuts which are not necessarily affordable, not necessarily rightly timed”.

Shadow work and pensions secretary Jon Ashworth warned policies floated by those hoping to succeed Boris Johnson could make the “cost-of-living crisis even worse”, suggesting they may end up being paid for by further cuts to the state pension and benefits.

But Work and Pensions Secretary Therese Coffey replied “far from it”.

– What else is happening to cushion the financial blow to households?

A range of cost-of-living support measures are about to start kicking in.

From Thursday, a first instalment of £326 will start to be paid out to low-income households on benefits.

A second payment of £324 will follow in the autumn.

Pensioner households will also receive an extra £300 to help cover the rising cost of energy this winter, while people on disability benefits will receive an extra £150 payment in September.

From October, households generally will have £400 taken off energy bills.

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