03/08/22

UK: Sunak and Truss’s room for tax cuts is ‘limited’, OECD warns.

As published on cityam.com, Wednesday 3 August, 2022.

Tory leadership hopefuls Liz Truss and Rishi Sunak’s room to cut taxes is limited, a top global economic institution said today.

The Organisation for Economic Co-operation and Development (OECD) said an ageing society and the need to boost public sector investment to lift growth will keep government spending higher for decades, limiting “the scope for tax cuts”.

Truss has promised to ditch the six percentage point corporation tax rise, scheduled to land next April, and reverse the 1.25 percentage point national insurance hike.

Sunak has said he will wait until inflation has been tamed before cutting Britons’ tax bills. He has pledged to cut the basic rate of income tax to 16p from 20p by 2029.

Economists supporting Truss have argued cutting taxes will boost business investment and support spending by allowing households to keep more of their paychecks, avoiding a recession.

Sunak’s supporters argue reducing taxes risks stoking inflation, already running at a 40-year high of 9.4 per cent, by pushing demand above the UK economy’s productive capacity.

Both Truss and Sunak’s campaigns did not respond in time to a request for comment.

The OECD also called on the Bank of England to follow through on promised rate rises to avoid losing its credibility.

“Clear and carefully communicated forward guidance will be important to limit second-round [inflation] effects and avoid uncertainty,” it said.

Bank governor Andrew Bailey last month said a 50 basis point rate hike is “on the table” at its meeting tomorrow. He did urge that other options are available to the monetary policy committee.