Cutting UK taxes now would be a mistake – IMF

• Posted on July 18, 2022July 18, 2022
• by Nana Kwesi Coomson
• Comment

Tax cuts are being promised by several Conservative party leadership hopefuls, but a top official at the International Monetary Fund has warned it might be better to raise them instead.

“I think debt-financed tax cuts at this point would be a mistake,” said Mark Flanagan, who leads the Fund’s UK team, speaking to BBC News.

The leadership contest has reignited the fierce debate over tax cuts.

Calls to tackle the soaring cost of living are growing louder.

While the former Chancellor, Rishi Sunak, has argued against cutting taxes, other candidates have touted promises including cuts to the basic rate of income tax and further cuts in fuel duty.

Tax breaks could offer some relief for households struggling to cope with the steepest increase in food and energy bills in decades.

The IMF is among the groups predicting the UK could see the slowest growth and most painful inflation of any G7 nation in 2023, thanks, in part, to reliance on fossil fuels, a big driver of inflation.

However, Mr Flanagan said tax cuts could be misguided and might even boost inflation by strengthening spending.

Money raised through tax, he argued, could instead be used to invest in the country’s long-term future

Many economists believe the UK’s challenges are very deep-rooted – with economic growth lagging behind many competitors since the 2007 financial crisis.

Torsten Bell, from the Resolution Foundation think tank, said this lag had “widened inequality” ever since.

The poorest households in France are now 25% richer than their UK counterparts, he said, meaning that UK households have been left less resilient to cope with the current cost of living shock.

The chief executive of Legal & General, Nigel Wilson, is among those who believe the UK’s longer term underperformance reflects a chronic lack of investment.

“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. “

The IMF’s Mr Flanagan said public money would be better channelled into projects that focus on sustained long-term economic prosperity – and that might need higher taxes.

“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 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.”

Private sector investment has also languished. Karen Ward, chief market strategist at bank JP Morgan and an adviser to Philip Hammond when he was chancellor, said a decline in investment became particularly noticeable from 2016 onwards.

“Relative to our competitors, there was a break in 2016 at the [European] referendum – business investment fell dramatically and just hasn’t recovered,” she said, adding that it remains 10% below the 2015 peak.

She said this had led to a less efficient economy – and so poor wage growth.

The IMF’s Mr Flanagan suggested resolving the current dispute over post-Brexit trading in Ireland could help revive investment.

“It’s going to be hard to convince companies to invest a lot in incorporating the UK into their supply chains, while issues related to cross-border movement of goods and services remain unsettled,” he said.

The tough choices for the next person to move into No 10 will start as soon as that famous door shuts behind them. And whatever actions they take may outlast their stay – shaping the UK’s future place in the world.

-BBC