Can Truss now deliver on her tax promises?
Liz Truss’s victory in the Tory leadership race is now likely to throw the spotlight on the tax promises she made during the election process. What we know so far is that she plans to prioritise tax measures over direct payments to households, and has already pledged several significant tax reductions.
To start with, she plans to cancel the anticipated 6 percent point rise in the corporation tax rate, leaving it at 19 percent. This rise was originally slated for April 2023. The thinking here is no doubt that it will boost investment and hopefully help retain the UK’s position as a competitive tax destination for business, which in turn will help fend off any post-Brexit isolation.
Truss has also indicated she will reverse the rise in national insurance contributions (the Health and Social Care Levy). As well as being costly for taxpayers, this measure has always been unpopular with Tory voters, as well as being a flagship policy of her rival for the leadership, Rishi Sunak. On that basis, it was always likely to be a target for Truss. This reversal will positively impact employees and employers who have been stung by this tax rise over the last few months.
Furthermore, Truss has said she will examine if she can reduce VAT across the board by 5 percentage points, down to 15 percent. This could be a really welcome boost to household incomes as we head into winter.
And, in one of her final interventions before the announcement of her victory, she ruled out any new taxes under her leadership.
It’s clear then that Truss differentiated herself strongly from Sunak’s more conservative approach to tax during the leadership campaign. Interestingly, some of Truss’s backers have gone even further and urged more radical measures to revive an ailing economy and the cost of living crisis. These suggestions have included a 10 percent point reduction in VAT rather than 5, and a 5 percent point reduction in the basic rate of income tax, down from 20 percent to 15. How realistic such cuts might be, or whether Truss will even entertain them, remains to be seen. But this does add some additional clarity to the direction of travel of those around her.
Ultimately, the real challenge the new prime minister will face is to maintain public services while delivering tax cuts. The ones she proposed on the hustings alone have been costed at £30 billion by some estimates. It was no doubt easy to make these promises as part of a plan to win the premiership. However, the reality for Truss of managing the public finances in the current economic climate will be more problematic. Her tax proposals will have won her approving nods, and votes, from Tory faithfuls tired of Rishi Sunak’s unpopular tax-and-spend policies, and her promises certainly seem very generous. The reality of running the economy and all the competing demands this brings will be far harder to deal with.