When the dust settles what will be the impact of Boris’s premiership on taxation and Rishi Sunak’s (first?) spell as Chancellor? In terms of tax changes, the big two events were the proposed rise in corporation tax – the first rise since Denis Healey – and the imposition of the health and social care levy. Assuming that these are not reversed by the subsequent Chancellor of the Exchequer, they will be the most significant changes made.
Boris as part of his election campaign in 2019 reversed the pledge to reduce corporation tax rates to 17% and proposed spending the extra money on the NHS. The rise to 25% due in April 2023 is a major reversal of the policies carried out by governments of all colours: Conservative, Labour and Coalition to keep the UK as an attractive destination for direct foreign investment. This reversal of the policy has been accompanied by more generous amounts of capital allowances including the super deduction. Rishi Sunak was planning to expand and extend these in the budget due in Autumn. Most candidates are looking to block the Corporation Tax rise.
The Health and Social care levy which for 2022/23 comes in the form of a rise in national insurance is another legacy. Having grasped the nettle of how to fund the ever-increasing cost of social care, it will be interesting to see how any candidates proposing to reverse this would seek to fund future social care.
The MPs will be whittling down the candidates to two by the time that Parliament is due to go to recess on the 21st of July. The Conservative party membership is then asked to choose between the remaining two candidates. It will be interesting to see what pledges are made regarding tax. In the last leadership election campaign, for example, Sajid Javid promised to reduce the rate of corporation tax further, but he was not successful. A number of candidates promised to increase the level of the personal allowance to £12,500 but this has now been achieved. The pledge to increase national insurance contributions to the same level as personal allowance has also been achieved.
One might suppose that the membership might be swayed by those who offer significant tax cuts. However, in the light of recent events the mood may be against cakeism (having your cake and eating it); in tax terms offering tax cuts without corresponding spending changes or increases elsewhere. It is also not a given within the Conservative party that tax cuts automatically win a candidate widespread approval. There is concern over the state of the public finances and the ability to borrow money. This is particularly heightened because of the increase in interest rates and the cost of financing government borrowing. As a considerable amount of UK debt is inflation link, the rise of inflation has a significant consequence for UK government borrowing.
There are also elements of expenditure which Conservative members would want to see increased. Top of the list at present is defence spending where there is a considerable concern that the current expenditure plans do not take account for the increased demands caused by the war in Ukraine. At the last leadership election Jeremy Hunt offered a much bigger increase in defence spending than Boris Johnson did. This time it may resonate more with Conservative members. There is also demand on the government to increase expenditure to further the levelling up goals. Given that the Conservative majority is reliant on the retention of some of the ‘red wall’ seats, one can expect this priority to remain high on any list.
The Autumn Budget will probably take place towards the end of October by which time the new administration should have been in place for about eight weeks. This will also coincide with probably additional pressure on household finances as a result of the raising of the energy cap. There will be pressure to give more immediate relief to households but if government becomes a bit calmer it may take a longer-term view.
If I were advising a leadership campaign and everyone is offering tax cuts, I would be tempted to offer a cut to Inheritance Tax to 20%, This would be popular with Conservative members. George Osborne moved the opinion polls in the Conservatives’ favour in 2007 when he promised a cut to IHT. It would also be cheaper than other tax cuts and at 20% IHT would be more in line with other countries’ rates.
The income tax reduction of 1p pencilled in for April 2024 will, I suspect, remain a goal but there will undoubtedly be significant changes before then. The details of how the tax cuts will be funded, will take longer to appear.
