The UK government’s budget watchdog has warned Conservative Party leadership hopefuls that cutting taxes would drive up inflation and put the public finances under pressure.
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(Bloomberg) — The UK government’s budget watchdog has warned Conservative Party leadership hopefuls that cutting taxes would drive up inflation and put the public finances under pressure.
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The looming battle to pick a replacement for Prime Minister Boris Johnson as head of the ruling party is likely to feature promises of tax cuts, which are the stated ambition of newly appointed Chancellor of the Exchequer Nadhim Zahawi. Zahawi is also a contender for the top job.
“If they are financed by greater borrowing, it puts more pressure on and arguably comes with additional risks in an economy that is running with high inflation,” Andy King, a member of the three-person board at the Office for Budget Responsibility, told a press conference Thursday.
The conclusions were part of the OBR’s biennial assessment of risks to the public finances. It showed the government will have to tackle slowing growth and rising prices that have resulted in the biggest squeeze on personal incomes in decades.
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Zahawi has said that “nothing is off the table” when it comes to tax cuts, a comment that suggests he may reverse increases in corporation and payroll taxes. Many Conservative lawmakers were alarmed at those tax hikes and have been calling for their removal.
In his resignation speech, Johnson raised the prospect that tax cuts will be the centrepiece of the forthcoming leadership battle.
“Our brilliant and Darwinian system will produce another leader committed to taking us forward through tough times, cutting burdens on families and business and — yes — cutting taxes,” Johnson said. “That is the way to generate the growth and income for public services .”
King pointed out that the chancellor has between £25 billion ($30 billion) and £28 billion of headroom for tax cuts before breaking the fiscal rules set by Rishi Sunak, who resigned on Tuesday night.
King said:
- Abandoning the increase in payroll tax would cost £19 billion
- Scrapping the corporation tax rise from 19% to 25% would cost £17 billion
- Reversing the freeze on income tax thresholds would cost £10 billion
- Making the temporary cut in fuel duty permanent would cost £3.5 billion.
Zahawi has said he will “bear down on inflation,” which is 9.1% currently and on track to rise into double figures.
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financialpost.com