The Institute of Fiscal Studies (IFS) analyses the future Tory leaders’ fiscal policies. Which makes more sense?
Jeremy Hunt
The foreign secretary has proposed reducing corporation tax, increasing the National Insurance contributions (NICs) threshold, increased defence spending, and reducing the student debt interest rate.
The IFS analysis says:
Reducing corporation tax to 12.5% – “Cutting the main rate of corporation to 12.5% would cost around £13 billion per year in the short run, though probably somewhat less in the long run.
“This is not a tax cut that would pay for itself as some have claimed – our existing tax base is too big for it to be plausible that this loss of revenue could be made up as a result of higher profits being reported in the UK.
“A cut of this scale would take the UK’s headline corporation tax rate to the second lowest in the OECD, alongside Ireland.”
Increasing the NICs threshold – “Increasing the NICs threshold is a good way of helping low earners through the tax system, though using the tax credit system would be more effective and better targeted.
“Raising the threshold is expensive however, costing at least £3 billion per year for each £1,000 that it is raised. Raising it to the current income tax personal allowance of £12,500 would cost at least £11 billion per year and take 2.4 million workers out of NICs altogether.”
Increasing defence spending – “Increasing defence spending to 2.5% of national income over the next five years implies spending £15 billion more in 2023−24 than today, and around £12 billion more than if spending remained at its current level of 2% of national income.
“Doubling defence spending as a proportion of national income, as Mr. Hunt has previously mooted, would cost more than £40 billion per year.
“Any significant increase would represent a major reversal in a 70 year trend – a trend which has allowed for more spending on the welfare state, and especially on health, without significant tax rises.”
Reducing student debt interest rate – “Cutting the rate of interest on student loans to just equal the RPI rate of inflation would cost very little in the short run and just over £1 billion in the long run.
“Because most students aren’t expected to pay back their loans in full, only around the highest earning 30% of graduates would benefit from such a policy. That said, the current system does mean high earners pay back more than the cost of their loan, providing an incentive for some families to pay up front.”
Boris Johnson
Front runner Boris Johnson proposes two policies, increasing the income tax rate threshold (HRT) from £50,000 to £80,000, and to increase the National Insurance Contributions (NICs) threshold.
The IFS analysis says:
Increasing HRT from £50,000 to £80,000 – “Increasing the HRT costs about £9 billion and benefits the 4 million or so income tax payers with the highest incomes. Most of the gain goes to those in the top 10% of the income distribution who would gain an average of nearly £2,500 a year.
“The biggest gainers will actually be high income pensioners as they won’t be affected by the accompanying increase in the NICs ceiling. While only about 8% of individuals would gain from this change in the short run, probably at least a quarter will at some point in their lives be higher rate taxpayers themselves, or will live in a household with a higher rate taxpayer.
“Raising the HRT to £80,000 straightaway would take about 2.5 million people out of higher rate tax, taking the number of higher rate taxpayers down to its lowest level since 1990. This would constitute a major change to our income tax system.”
Read more about Johnson’s proposed tax cut from industry experts.
Increasing the NICs threshold – “Increasing the point at which people start to pay NICs is probably the best thing one can do through the tax system to help low earning individuals, though even this policy offers most benefit to higher income households. Increases in tax credits would be significantly more effective if the main intention is to help low earners in low income households.
“Increasing the floor is expensive though, costing at least £3 billion a year for each £1,000 that it is raised. Raising it to the current income tax personal allowance of £12,500 would cost at least £11 billion and would take 2.4 million workers out of NICs altogether.”
The verdict – “expensive pledges”
Paul Johnson, IFS Director said: “Like his rival, Jeremy Hunt has made some expensive pledges in his campaign to become prime minister. Cutting the corporate tax rate to 12.5% could cost £13 billion a year in the short run. While the long run cost is likely smaller this is not a tax cut that could pay for itself as some have suggested.
“More radical relative to recent history is his proposal for a significant increase in defence spending. A £15 billion increase, alongside the proposed corporate tax cut, would leave no scope to relieve the pressure on other areas of public spending without tax rises or a fiscal stance which risked putting debt on a rising path.”
Tom Waters, a Research Economist at IFS said:
“These are expensive pledges to cut tax. Raising the higher rate threshold as far as £80,000 would be a radical change benefiting high income households only, though it is important to be aware that the numbers paying higher rate tax have crept up over time, largely unannounced. There are now more than 4 million higher rate taxpayers compared with 1.5 million 30 years ago.
“Raising the floor for NICs helps low earners, though raising tax credits would be much more effective and better targeted if that were the key aim. These pledges between them will cost many billions of pounds. It is not clear that spending such sums on tax cuts is compatible with both ending austerity in public spending and prudent management of the public finances”