One of the key dividing lines of the current Tory leadership contest concerns economic policy. The gap between the candidates is not actually very large, but of course political arguments often magnify small differences. And in this case there quite an important philosophical difference that could have significant consequences over the longer-term.
Broadly speaking, Rishi Sunak is the candidate of economic continuity – how could he be otherwise, given that until a couple of weeks ago he was in charge of economic policy as Chancellor of the Exchequer. His plans involve large tax rises. Even before inflation raced ahead of expectations his plans scheduled the total tax rate rising to its highest level since 1948. He says he does want to cut tax eventually, but as Chancellor we saw that he committed to high spending levels.
Inflation has flown way ahead of expectations since Sunak set his plans last October. At that time he was only expecting CPI inflation to reach 4.4 per cent. Now it’s expected to reach 11 to 12 per cent and to stay elevated for longer. That means there is a lot of additional unexpected tax revenue coming in, since higher inflation means more people get dragged up into higher income tax bands and corporate tax and VAT receipts are higher. The consequence is that there is about £60 billion in ‘fiscal headroom’.
Sunak already knew there was some extra headroom in March, at the time of his Spring Statement. He used it to fund extra spending to help mitigate the impacts of high inflation. As for controlling inflation itself – well, as Chancellor he was pretty clear that he thought that was nothing to do with him. He never once admonished the Bank of England for failing to meet the inflation targets he set.
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