Only two candidates remain in race to replace outgoing prime minister Boris Johnson: former chancellor Rishi Sunak and foreign secretary Liz Truss – both of whom have made the issue of tax central to their campaigns.
The cost of living crisis, caused (chiefly) by the economic fallout of the war in Ukraine and debts racked up during the pandemic, has made the candidates’ economic approach top-of-mind for many Conservative Party voters, with both Truss and Sunak seeking to differentiate themselves from the other with their own financial approach. Ameliorating the current ‘stagflation’ gripping the UK will not be easy, especially when facing huge global macro-economic forces.
So how do the two candidates’ approaches differ?
To cut, or not to cut
From the start, Truss has argued for tax cuts, even when faced with mounting debt. This (should) play well with classic Conservative voters in the southeast, who favour a low tax state. She wants to ditch increases to National Insurance and corporation tax, while pausing green levies on energy bills.
Sunak, on the other hand, would not cut taxes until inflation was under control. It is unfair, he has argued, to pass the large bill accumulated during the pandemic to our children and grandchildren. Truss says that paying the debt back this way would push the UK into a recession, with her camp favouring a delayed approach to repayment, beginning in three years’ time. Sunak believes that Truss’ plans would increase interest rates, which his opponent has rejected as “scaremongering”.
Corporation tax and NI
Sunak has previously proposed an increase in the UK corporate tax rate from 19% to 25%, from April 2023. As chancellor, he previously increased National Insurance by 1.25%, starting April 2022. The rise affects both employees and employers, with the aim of further funding the NHS and social care across the country. This is accompanied by a change in the NI threshold from £9,880 to £12,750, taking 2 million lower earners out of the tax altogether, and making everyone earning under £32,000 a year better off, ultimately.
The Adam Smith Institute, a free market think tank, has stated that Sunak’s corporation tax increase would lower business investment by 7.6% and average household wages by £2,500. Seven economists wrote to The Telegraph, arguing that in fact tax cuts were necessary due to “unbearable strain” on family finances. A looser fiscal stance focused on targeted tax cuts was essential to tackle stalling growth.
VAT on energy bills
It came as a surprise when Sunak announced a halt to VAT on domestic energy bills on July 25th, with some suggesting it was brought out to save his ailing campaign. At time of writing, Sunak is trailing Truss amongst grassroots Conservative party members, despite strong endorsement from MPs. He had opposed the change earlier in the year.
A snap YouGov poll of 507 Conservative party members who watched the BBC debate on 25th July found that Truss was seen as the better performer with 50% vs 39%. Truss also performed better on the issue of taxation (51% vs 42%), the cost of living (55% vs 34%), levelling up (51% vs 30%) and even the environment (33% vs 27%) – which is strange considering her pledge to cut green levies!
In a way, Truss’ more radical changes to the tax system are a more exciting sell, offering short-term gains to both workers and business owners. Sunak’s ‘steady as she goes’ approach is less riveting, even if economically sound from a long-term perspective. We do wonder if this has affected the candidates’ standing with the Tory grassroots.
The Hamilton Blake view
Like all good politicians, we’re not going to give you a straight answer on this one!
There are immediate advantages to Truss’ tax cuts, many of which would put more money back in the pockets of our clients and their employees, which could then stimulate investment and expansion. Sunak’s more steady approach has its benefits too though, lowering national debt through heightened taxes and – hopefully – getting inflation back in line.