Liz Truss's tax plans backed by leading economists as 'needed and not inflationary'

 The Foreign Secretary has come under fire from Rishi Sunak for what he called her 'fantasy' economics

Source - Daily Telegraph ,- 24/07/22

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Liz Truss’s tax-cutting plans have been backed by a group of prominent economists, the Daily Telegraph can reveal.

The Foreign Secretary has come under fire from Rishi Sunak over her plans to slash National Insurance and reverse a scheduled rise in corporation tax - proposals the former Chancellor has described as “fantasy” economics.

But, in a letter to The Telegraph, seven economists have now offered their support for Ms Truss’s plans for “timely, targeted and fully affordable tax cuts”.

And the Adam Smith Institute, a free market think tank, said that pressing ahead with Mr Sunak’s plans for a corporation tax increase would lower business investment by 7.6 per cent and average household wages by £2,500.

The seven economists, led by Dr Graham Gudgin from the Centre for Business Research at Cambridge University, said tax cuts were necessary because they were putting “unbearable strain” on family finances.

They wrote: “The policy solution necessitates a tighter monetary policy from the Bank of England to control inflation and a looser fiscal stance, focused on targeted tax cuts, to address weakening growth.

“Thus, timely, targeted and fully affordable tax cuts are needed.

“Given the nature of our inflation shock - driven by global supply-side pressures and previously lax monetary policy - targeted tax cuts will not be inflationary. The domestic economy is not overheating.

“They are affordable too. At the time of the Spring Statement there was fiscal space that was not used and since then higher inflation has boosted tax revenues.”

It comes after three former members of Margaret Thatcher’s Cabinet at the weekend said the Iron Lady would never have approved of Ms Truss’s promise to slash £30billion off taxes funded by borrowing.

Their criticisms were dismissed by Therese Coffey, Ms Truss’s campaign chief, who said they had not been in government for “a very long time”.

But Welsh Secretary Robert Buckland, who is backing Mr Sunak, said his candidate wanted to emulate Thatcher's “fiscal prudence”.

In a swipe at the Foreign Secretary's plans for tax cuts, which are popular with the Tory base, he said: "It’s good to have a straight-talking candidate who isn’t trying to be popular, but is trying to do the right thing.”

Other signatories on the letter include Graeme Leach, chief economist at Macronomics; Dr Gerard Lyons, senior fellow at Policy Exchange; and independent economist Julian Jessop.

The rest comprise Douglas McWilliams, executive deputy chairman at the Centre for Economic and Business Research; senior private economic forecaster Harry Western; and Shanker Singham, academic fellow at the Institute of Economic Affairs.

Mr Singham advised Boris Johnson on leaving the EU, when he became known as the “Brexiteers’ brain”.

They write: “There is a need for targeted tax cuts to happen immediately, while further fully affordable measures can be brought forward in a Budget, alongside other options.

“Tax cuts are necessary. The UK is on track for its highest tax burden in seventy years, placing an unbearable strain on households and undermining competitiveness.”

Separately, Dr Lyons, a former economic adviser to Boris Johnson, told Times Radio that interest rates "need to be higher", but he declined to put a figure on how high they should go.

He said that tax cuts and interest-rate rises were "opposite ends of the same see-saw," adding: "That is, if you push taxes down it doesn’t inevitably mean interest rates go up."

But he told Times Radio that rock bottom interest rates had fuelled inflation and would have to rise.

"Interest rates need to be higher." He said. "Now picking out a figure is not the thing to do. The point is to accept that monetary policy was too loose last year."

Corporation tax increase

The Adam Smith Institute backed Ms Truss’s aim to ditch Mr Sunak’s planned increase in corporation tax from 19 per cent to 25 per cent.

The free-market think tank said reversing the planned hike and other changes would raise investment by almost 10 per cent and GDP by 3 per cent.

Daniel Pryor, head of research at the Adam Smith Institute, said: “It’s vital that the next Prime Minister goes for growth and boosts Britain’s bleak business investment numbers.

“But as this report shows, the coming corporation tax hike and the end of the super-deduction will hammer the economy, choke off investment and reduce the average household wage by £2,500.

“If the contenders for the Conservative party leadership are serious about getting Britain back on track, they should commit to cancelling the corporation tax increase and making full expensing of capital investment permanent. In the long-run, keeping corporation tax low largely pays for itself.”

Steve Baker, Tory MP for Wycombe and a supporter of Ms Truss, said: “As individuals, families, and businesses suffer from the cost of living crisis, it is clear that we need to spur investment and output in the UK. This cannot be done by increasing corporation tax.

“Cancelling the increase to corporation tax and allowing firms to continue to fully expense new equipment will boost our economy and increase investment at a time when we need it the most.”

On Sunday, Tory grandees Chris Patten, Norman Lamont and Malcolm Rifkind all told The Observer newspaper that Baroness Thatcher would not have approved of cutting taxes to curb inflation.

Mr Patten said: “Margaret Thatcher was a fiscal Conservative who did not cut tax until we had ruined inflation. She was honest and did not believe in nonsense.”

But Work and Pensions Secretary Therese Coffey told Sky News: “I don't know the basis on which they're saying that: many of them were not in the original Margaret Thatcher Cabinet at the start when she took over in 1979.

“I'm not going to exchange comments with people who haven't been in government for a very long time.”

Welsh Secretary Robert Buckland pointed out that Baroness Thatcher took six years to lower income tax because she wanted to bring down inflation first. He said: “What unites us as Conservatives is a belief in sound money, and balancing the books.”

He said building up big debts makes the government “vulnerable” and “reduces our credibility as an economic power”.

“It is vital that we focus upon the beast of inflation: previous Conservative governments excelled at beating inflation and driving it out of our economy. We need to do the same again this time.

“I think placing precedence on that, rather than coming up with the popular and easy option of offering tax cuts immediately, is the better approach.”