Tory Leadership Race: Leadership hopefuls promising tax cuts but IMF says raising them could be better

Several Conservative party leadership hopefuls are promising tax cuts if elected, but a top official at the International Monetary Fund (IMF) has said that raising taxes instead might be better.

When speaking to BBC News, Mark Flanagan, the leader of the IMF’s UK team, said: “I think debt-financed tax cuts at this point would be a mistake.”

Former Chancellor, Rishi Sunak has argued against cutting taxes, but other candidates have promised cuts to the basic rate of income tax and further cuts in fuel duty.

The debate over tax cuts comes at a time when there are increasing calls to tackle the cost of living crisis.

Would businesses benefit more from tax cuts or hikes?

As the debate over tax cuts goes on, there are question marks over which approach would be most beneficial for businesses.

The IMF predicts that the UK could see the slowest growth and most painful inflation of any G7 nation in 2023, which is partly due to its reliance on fossil fuels, one of the biggest drivers of inflation.

However, Flanagan says tax cuts could boost inflation by strengthening spending. He argues that money raised through tax could instead be invested in the UK’s long-term future.

“The UK does have a below-average tax ratio relative to the rest of the Organisation for Economic Co-operation and Development. You can’t have it both ways,” he said.

“At some point, you have to decide, do we want to invest in the climate transition? Do we want to invest in digitalisation? Do we want to invest in skills for the public? Well, if you do, you need the resources to do it. And the way to realise those resources is to lift the tax ratio a little bit.”

Whilst tax cuts could increase spending, with fears of a growing recession, the additional income might not necessarily end up in retailers’ pockets.

However, according to several economists, economic growth in the UK has been lagging behind many of its competitors since the 2007 financial crisis.

Torsten Bell, the CEO of the Resolution Foundation, said the poorest households in France are now 25% richer than their UK counterparts.

Legal & General CEO, Nigel Wilson was also quoted by the BBC saying that he believes the UK’s poor economic performance is due to a lack of investment over a long period of time.

He said: “I think [the UK] is full of potential but we’ve had massive underinvestment for 30, 40 or 50 years in skills, in infrastructure… as a consequence, we’re a low wage, low productivity, low growth economy, fraught by political infighting. ”

So, does the need for a short-term boost to help with rising living costs eclipse that for long-term gain in an infrastructure that has long been underfunded? That is what the Tory leadership hopefuls will need to decide.