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When tax becomes a dangerous political weapon

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Tax and spending pledges made by the Tory leadership candidates Boris Johnson and Jeremy Hunt are eye-catching and add up to tens of billions of pounds, and would put the country on a path to higher borrowing and rising debt. The question is how seriously we should take them.

Think about the tax changes of recent years, and boldness is not a description that springs readily to mind. The boldest tax change dates back to the start of the coalition government. Hardly had the dust settled on the 2010 election than George Osborne announced an increase in VAT from 17.5% to 20%.

True, some of the tax changes since then have been cumulatively significant, as politically was Osborne’s 2012 announcement of a reduction in the top rate of tax – the additional rate – from 50% to 45%. The main rate of corporation tax, 28% to 2010, has been gradually brought down to just 19%, with a further reduction to 17% intended to take effect in April 2020. Over time, too, the personal allowance has been raised from £6,475 in 2010/11 to £12,500 now, and the higher rate threshold from £37,400 to £50,000.

It is fair to say, however, that it is a very long time since we have seen anything quite like the tax and spending promises being flung around in the current Tory leadership contest. Make such promises during a general election and the opposition would be screaming ‘unfunded pledge’ before the ink was dry on the announcement. In a leadership contest, though, the normal rules appear not to apply. I shall come on in a second to why that might be.

First, let me remind you of some of the promises that have been coming so thick and fast it has been hard to keep up. By the time you read this, there will no doubt have been a few more. The latest at time of writing were emergency no-deal promises for farmers, fishermen and small firms, and a boost to public sector pay.

Boris Johnson’s standout pledge, though not necessarily his most expensive, is to raise the higher rate threshold, the point at which people start paying 40% tax, from £50,000 to £80,000. On its own this would cost around £20bn a year but an accompanying measure, removing the national insurance (NI) ceiling, brings down the cost to £9bn a year. And this, as the Institute for Fiscal Studies points out, makes it a particularly attractive tax change for pensioners.

As it says: ‘Increasing the HRT (higher rate threshold) costs about £9bn and benefits the 4m or so income taxpayers with the highest incomes. Most of the gain goes to those in the top 10% of the income distribution would gain an average of nearly £2,500 a year. The biggest gainers will actually be high income pensioners as they won’t be affected by the accompanying increase in the NI ceiling.’ Johnson knows that many Tory members fall into that demographic.

Another NI change, hinted at but not spelled out by the Johnson camp, is raising the NI floor, the point at which it starts being levied, to the level of the personal allowance, £12,500. This would cost £11bn, even more than the higher rate threshold. The leadership favourite has also talked of an emergency no-deal budget in which stamp duty would be abolished on properties up to £500,000, £5bn a year extra for ‘historically underfunded’ primary and secondary schools and full-fibre broadband for all by 2025. The Johnson tax and spending plans are a work in progress, as noted, but it is not hard to get to a figure of well over £30bn on the basis of what we already know.

For Jeremy Hunt, perhaps surprisingly, the figures are even bigger. According to the IFS, his policy of reducing the main rate of corporation tax to 12.5% would cost £13bn a year, though with the possibility of offsetting gains later from businesses deciding to locate in Britain. The sums for raising the NI threshold would be the same as for Johnson; up to £11bn a year. There would be an extra £15bn a year from raising defence spending to 2.5% of gross domestic product (GDP), or £40bn a year from doubling its GDP share. A smaller £1bn a year would come from cutting the rate of interest on student loans.

The Hunt tax and spending proposals, which could cost as much as £65bn, invite comparisons not just with Johnson but also with Jeremy Corbyn and John McDonnell.

As the IFS puts it: ‘Mr Hunt’s combination of policy proposals would exacerbate these pressures and widen a gap in the public finances that will ultimately need to be filled through some combination of higher borrowing, tax increases or cuts to other areas of spending.’

With sums like this flying around, it would be very easy to be gloomy about the public finances. Philip Hammond will not be chancellor under the new prime minister and is rightly concerned that his legacy, in which government borrowing is now firmly under control, is in serious jeopardy, as will be the hard-won Tory reputation for stewardship of the public finances. Austerity cost the party dearly, and Hammond fears the fiscal gains it achieved could be sacrificed.

He is right to be concerned but there are one or two caveats. The first is that, while some of the pledges made by Johnson and Hunt are firm, and from the horse’s mouth, others are less so. Johnson, in particular, has got some of his tax-cutting and spending ideas into the public domain by means of aides briefing journalists. When pressed, he has talked of ambitions rather than firm pledges, even on the higher rate threshold. For both candidates, a possible get-out may be that things said in the heat of battle should not necessarily be taken as gospel.

There is also the time element. When tax-cutting pledges are made, the sense, probably deliberate, is that they will be enacted immediately. In practice, these things usually take time. So just as it took time to get from a corporation tax rate of 28% to 19%, and from a personal allowance of £6,475 to £12,500, so the same would surely apply to the Hunt and Johnson tax proposals. They would be wheeled out gradually. That, at least, is what the Treasury would hope.