The trouble with Sunak’s tax promise

1 August 2022

5:12 PM

1 August 2022

5:12 PM

Rishi Sunak should have started his campaign offering a 4p cut to income tax, instead of focusing on a Cameronesque finger-wagging ‘stability before tax cuts’ message. His pledge to cut the basic rate of income tax to 16p, unveiled last night, now looks like a panicked U-turn when it is in fact consistent with his long-standing view of politics: that Britain is in danger of turning into a high-tax, high-spend European style social democracy because Tories keep forcing through extra spending without thinking how they’d pay for it. As Chancellor, he sought to stand athwart such process by putting up taxes and hoping the pain would force his party to think twice about the extra spending they all wanted. So his long-term aim was lower spending and lower tax. But in the short term he’d be caricatured as the face of higher tax.

His timeframe is by the end of the next parliament: so, seven years. This is consistent with his idea that taxes must come down sustainably – i.e. matched by cuts that no Tory seems to want to mention. But this poses an obvious problem: what might pop up during these seven years? The problem is that Sunak ran for election in 2019 on a manifesto pledge not to raise National Insurance – yet he tore up this pledge in April. His excuse? That a pandemic was in no one’s manifesto. So Sunak was saying that if something unexpected comes up, then all tax promises are null and void.
In arguing that a tax rise was justifiable given unforeseen circumstances, Sunak lost the right to be taken seriously on future tax-cutting pledges. After all, what unforeseen circumstances might there be in the next seven months – let alone next seven years? And he doesn’t even say if his 4p tax cut is an aspiration or a firm pledge.
He doesn’t help himself by being a bit economical with the actuality when explaining things on BBC Radio this morning. ‘As chancellor I was very keen to make sure that I started cutting taxes and what I announced today builds on that,’ he said. Not really. As chancellor the path he set us on was towards the highest tax burden in 77 years – any taxes he cut were offset by tax rises elsewhere. See graph below.

Perhaps he meant that he intended, had he stayed, to cut the basic rate of income tax the year after next by 1p to 20p after raising National Insurance in 2022. As he told Nick Robinson on Radio 4 this morning:

‘I already said we’re going to cut income tax for the first time in 15 years and as Prime Minister I want to go further than that and cut income tax by a fifth to 16p.’

So he’s talking about a tax cut that he may or may not have delivered in April 2024 – it’s hard to ‘build on’ something that doesn’t really exist in the first place. He said he’d pay for this by growing the economy, which takes us to an awkward point: the UK economy isn’t really expected to grow in coming years, unlike the rest of the G7. Here’s the latest OECD prognosis:

Yet again, Sunak was asked if he can name any other country that’s raising tax (he plans to hike corporation tax from 19p to 25p) and couldn’t. No other country, he explained, has an NHS soaking up so much of the tax revenue.

And yes, it’s hard to subject Liz Truss’s plans to the same scrutiny. She has given very little detail, so no one has done graphs like the above to suggest what her plans would mean for growth etc. Any graph of her plans would probably point to a big black hole, with no plans about how it might be filled.

Sunak may have regarded the 2019 manifesto pledges as gimmicks – how can you pledge to both reduce the debt and not raise tax when a crisis may force you to do one or the other? He could also argue that after Johnson broke the manifesto pledge on spending restraint (which he did within months) the other pledges fell away. But Sunak doesn’t make this point.

There is a strong case for not making such promises at all in manifestos because – as Nick Clegg said – you should not make a promise that you’re not absolutely sure you can keep.
But as Clegg found out, promise-breakers tend to be punished in elections. This is why, in my view, raising National Insurance was Sunak’s worst mistake. The amount of extra cash it raised was pretty small (especially after Sunak tried to soften the blow by raising the threshold) and it destroyed the Tory claim to be taken seriously in future pledges. And I’m afraid people will struggle to take Sunak seriously now.

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