Tory leadership rivals should not be promising tax cuts, the UK head of the International Monetary Fund has warned, calling on candidates to prioritise investment in the economy.
In a pointed intervention to the race to succeed Boris Johnson, Mark Flanagan, head of the IMF’s British mission, said that debt-financed tax cuts “would be a mistake”.
The next prime minister should instead focus on improving economic productivity, Flanagan said, by finding extra money for skills training, digitalisation and net-zero technologies.
“I think debt-financed tax cuts at this point would be a mistake,” Flanagan told BBC News. “The UK does have a below-average tax ratio relative to the rest of the Organisation for Economic Co-operation and Development.
“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.”
His comments came after the former chancellor Rishi Sunak clashed with Liz Truss and Penny Mordaunt over tax policy in Sunday’s televised debate.
Truss and Mordaunt favour tax cuts to spur economic growth but Sunak said it would be irresponsible to promise cuts before inflation was under control. But in a boost to those calling for tax cuts, the Centre for Economics and Business Research (CEBR) said the next prime minister would have scope for £60 billion worth of tax cuts as inflation and frozen tax bands had led to higher receipts for the Treasury.
The think tank calculated that higher inflation would result in extra revenues of £133 billion a year by 2024-25. Slightly more than half of this would be swallowed up by additional spending, such as higher state pension payments and servicing the national debt tied to inflation. But that would still leave £60 billion a year for tax cuts.
“People are paying higher taxes and the question is, will the government give them their money back or will they blow it on something else?” Douglas McWilliams, the CEBR’s deputy chairman, said.