Tax cuts: Where do Rishi Sunak and Lizz Truss stand?

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 Tax cuts: Where do Rishi Sunak and Lizz Truss stand?
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Highlights:

  • The UK will get a new prime minister on 5 September, and it'll either be Rishi Sunak or Lizz Truss.
  • Both have sharply divergent plans to handle to economy and deal with challenges like inflation.

The Conservative leadership contest is down to two contenders. The UK will have a new prime minister in September, and it will either be former Chancellor Rishi Sunak or foreign secretary Lizz Truss who would replace Boris Johnson. Sunak's resignation last month led to a series of exits from the cabinet, eventually forcing Boris Johnson to step down as the prime minister. Truss, on the other hand, remained loyal to Johnson and didn't resign from her position.

Members of the Conservative Party have till 2 September to cast their vote and choose a new leader, and the results will come out on 5 September. 

Several candidates were in the race to be the new Conservative leader, and everyone's primary focus was the economic growth, high inflation, and the cost-of-living crisis. However, their pitches varied differently. Both Sunak and Truss have sharply divergent views on how they plan on handling the UK economy.

What are the challenges for the new PM?

The first and foremost concern is the economy, which is going through turbulence as inflation has been breaking decades-old records every month for some time. In June, inflation levels touched 9.4%, up from 9.1% in May, according to data from the Office for National Statistics (ONS). People have cut down on discretionary spending, and some have also reduced eating, heating, and spending on other essentials as energy prices have risen.

The government has announced several benefits to help ease the cost of living, like discounts on energy bills and a duty cut in fuel prices. 

The UK will get a new prime minister on 5 September, and it'll either be Rishi Sunak or Lizz Truss.

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Tax cuts: Sunak vs Truss

Among their pitches, both Sunak and Truss have stressed how they plan to bring down taxes, with the debates turning bitter in some instances.

In his latest attempt to woo the party members, Sunak has pledged the largest cut in income tax in 30 years by slashing the base rate by 20%. This would bring the base rate from the existing 20p in the pound to 16p. Sunak also said it would not burden government's debt and it would be funded by additional tax receipts generated by forecast economic growth. This is a realistic promise in the current economic scenario, according to Sunak, promising that he'll always be honest about the challenges.

Sunak had recently said that he'll cut income tax by 3p in the pound by the end of 2029, which would cost the government about £19 billion a year.

This is a slight variation from the stand that Sunak has taken so far in the contest by not announcing any tax cuts. On Monday, he re-emphasized that he wouldn't cut taxes in a way that would just increase inflation and also won't make promises that he can't pay for.

He has also attacked his rival Truss for her 'comforting fairy tales' about tax cuts, saying that borrowing more isn't the solution to bring down inflation and may instead cause it to rise. 

It is important to note that since Sunak resigned as the Chancellor last month, announcing any major changes to the current policies would be seen as politically problematic for him.

There are predictions that energy bills may exceed £3,000 a year by the end of this year when the new energy price cap revision comes into effect. It would also increase inflation to slightly above 11%, the Bank of England (BoE) has predicted. To deal with it, Sunak has announced a reduction in the VAT on domestic fuel bills from 5% to zero if the average bills appear to be rising above £3,000. This reduction is expected to cost the government around £4.3 billion, although the cost is subject to the actual rise.

Sunak claims the reduction in VAT will save about £160 in average bills, but it is again something that depends on the actual rise in the energy price cap. At present, the VAT on an average bill is £94.

In May, Sunak had dismissed the idea of reducing VAT, calling a flat rate payment more progressive than it.

While both Sunak and Truss are stressing on helping Brits with the cost of living, the former prefers a more orthodox approach, saying yes to tax cuts only after balancing the books.  

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On the other hand, Liz Truss wants to get on with tax cuts, putting the burden it'll cause on government debt. She has announced tax cuts from the first day of her premiership. One of them is the cancellation of the planned corporation tax, which is levied on the profits of businesses. It is set to increase to 25% from the current 19% from April 2023. The rise was announced by Rishi Sunak when he was the Chancellor. Cancelling the increase would cost the government £17 billion a year.

Another promise that Truss has made is the temporary suspension of green levies on energy bills, which are added to fund schemes for renewable energy and provide grants for insulation. Energy regulator Ofgem says they add about £153 to an average dual fuel bill. Truss claims she's still committed to net zero, so the projects will have to be funded in some other way.

Truss has also promised to do away with the rise in National Insurance (NI) rise that came into effect from April. NI is a tax paid by most UK employees and employers on earnings and self-employed profits. It funds several government programs, including the state pension. But according to the Institute for Fiscal Studies (IFS) it will cost the government an additional £13 billion.

Conclusion

With these announcements, both Sunak and Truss are trying to focus on issues that would matter to voters in the next elections. If Conservatives want to repeat their 2019 performance, they'll have to emphasize on issues like inflation, cost of living, taxes, job growth, immigration, NHS, etc. These are the big-ticket changes and if implemented it may have a long-term impact come next elections.

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