UK economic woes: are tax cuts the answer?

News that the UK is expected to be the only major global economy to shrink in 2023 has renewed calls from some Conservative MPs and commentators for immediate tax cuts to stimulate growth.

Forecasts released by the International Monetary Fund said the UK economy will contract by 0.6% in 2023, rather than grow slightly as previously predicted. This would mean it performing worse than other advanced economies, including sanctions-hit Russia, as the cost of living continues to hit households.

The BBC said the IMF has painted a “bleak picture” for the UK. However, Chancellor Jeremy Hunt has so far resisted “pressure from some in his party to cut taxes to stimulate the economy”, warning it was “unlikely” that there would be room for any “significant” tax cuts in the spring Budget, and that lowering inflation “is the best tax cut right now”.

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‘Targeted tax cuts will help growth’

A new pro-tax cuts group of around 40 Tory MPs – enough to deprive the government of a Commons majority – called the Conservative Growth Group is already meeting to discuss ideas. They are expected to be joined by the last two occupants of No.10, Liz Truss and Boris Johnson, who are both reportedly planning pre-Budget public interventions.

The Financial Times reported that Truss, whose dramatic tax-cutting experiment nearly crashed the UK economy and forced her to resign as PM after just 50 days only a few months ago, will push for tax cuts “despite new forecasts warning of slower growth and lower tax revenues than expected”.

Some Conservative MPs have blamed the chancellor for the disappointing IMF figures, arguing that his decision to increase taxes was dragging down growth. They have been joined by some of the more Conservative-friendly newspapers, including the Daily Mail and Daily Telegraph, in calling for immediate tax cuts.

Former Tory leader Sir Iain Duncan Smith told the i news site: “I have said for some time we need growth or our debts will get bigger. Targeted tax reductions will help achieve that,” he argued.

Among proposals being discussed by the Conservative Growth Group are a drive to reduce regulation, short-term fiscal stimulus, lower government spending, stalling the planned corporation tax rise, and a review of IR35 payroll rules.

“Those who make up this new growth group see the Spring Budget as a test – but ultimately the autumn statement and then the pre-election Budget are the most important events,” said Katy Balls in i news. But “by getting the arguments in now, they hope to shape the debate around those – and the debate on the direction of the Tory party if they head to an electoral defeat (as polls currently imply)”.

‘People seem to have very short memories’

Setting out his vision for the country in a speech at Bloomberg on Friday, Hunt said that the “biggest and quickest tax cut” the government could deliver “for families up and down the country” was to “halve inflation”. It is this focus on bringing inflation down rather than cutting taxes that has put him on a collision course with many in his party.

The FT went further and said: “The insistence of the Tory right that tax cuts are needed in the Budget exasperates Sunak and Hunt, whose strategy is to stabilise the economy and bring inflation under control.”

“People seem to have very short memories,” an ally of Hunt told the paper, referring to his predecessor Kwasi Kwarteng’s “mini-budget” statement last September that sent markets into turmoil and the pound tumbling.

“Whatever sympathies one may have for the Trussites of the Conservative Growth Group, there is no responsible case for cutting taxes on income or consumption against this macroeconomic background,” said The Telegraph’s world economy editor Ambrose Evans-Pritchard.

“Whatever is gained from the countercyclical stimulus is more than lost on higher bond yields, higher mortgage rates and higher refinancing costs for companies, as well as higher Treasury payments on inflation-linked gilts,” he wrote. “Rishi Sunak is surely right: we are not ‘idiots’”.