London Daily

Focus on the big picture.
Friday, Oct 02, 2026

Analysis: Tax-cut talk in UK leadership race adds to inflation angst

Analysis: Tax-cut talk in UK leadership race adds to inflation angst

Promises of tax cuts from candidates to succeed British Prime Minister Boris Johnson pose another inflationary risk which could pressure the Bank of England to raise interest rates more aggressively, cancelling out any potential boost to the economy.

Most of the 11 contenders, trying to portray themselves as defenders of the Conservatives' traditional low-tax ethos, have promised to ease a tax burden which is set to hit its highest since the 1940s.

With little mention of any off-setting spending cuts, the pledges mark a further departure from the era of fiscal restraint - or austerity - that was the hallmark of Conservative Party policy for much of the decade before the coronavirus pandemic spurred a historic surge in spending, and debt.

Even big-spending Johnson, who last week announced he will step down after a scandal-strewn three years in power, has balked recently at the prospect of immediate tax cuts with inflation barrelling towards double-digits.

For some, the calls to cut taxes sit uneasily with the economic realities facing Britain. The International Monetary Fund and the Organisation for Economic Co-operation and Development have warned that the country runs a bigger risk of persistently high inflation than other similar economies.

"(It) feels like this leadership election is dodging the key issue facing the Conservative Party: you can't have (Margaret) Thatcher levels of taxation and Johnson levels of public spending," said Gavin Barwell, who was chief of staff to Johnson's predecessor Theresa May.

The government's fiscal forecasters have warned that Britain faces an unsustainable debt burden, more than three times its already historically high level in 50 years' time unless future governments take action.

The horse-trading over taxes represents potential headache for BoE policymakers concerned about the persistence of inflation.

While tax cuts could inject some stimulus into an economy that looks set to flat-line in 2023, a wider budget deficit might further weaken the pound and stoke inflation.

"If you're looking at big tax cuts funded by borrowing in the short run then that might have some small effect, in the wrong direction, on inflation," Paul Johnson, director of the Institute for Fiscal Studies think tank, told the BBC.

"It may result in the Bank of England increasing interest rates a little bit further and a little bit faster than they otherwise would have done."

Philip Shaw, chief economist of Investec bank, agreed.

"The response to looser fiscal policy by the Bank of England may be to hike rates more aggressively, to counter the resulting upward pressure to inflation that this would bring about," he said.

While there is little detail about the candidates' promises, differences are emerging on the scale of the support being offered by Johnson's successors.

Some have pledged sweeping tax cuts aimed at both businesses and households, on the grounds this would boost corporate investment and help hard-pressed households grappling with inflation.

While economists say cuts to taxes on consumers would offer short-term relief in the cost-of-living crisis, they are more likely to be inflationary in the long run with benefits skewed towards wealthier households.

TAXING QUESTIONS


Sajid Javid, who resigned as health secretary last week and previously held the finance and business ministerial briefs, has promised to lower the duty paid on motor fuels, income tax, and corporation tax. He has also pledged to reverse an increase in National Insurance (NI) - or social security - contributions.

Current foreign Secretary Liz Truss has said she would reduce the NI increase and cut corporation tax.

Jeremy Hunt, one of Truss's predecessors and a former health minister, said he would cut "all taxes" but would focus on cutting corporation tax first, saying it would be least inflationary.

By contrast, Rishi Sunak - who was finance minister until his resignation last Tuesday - has stressed the need for fiscal restraint and dismissed the "comforting fairy tales" of rival contenders that would leave the next generation poorer.

Keir Starmer, leader of the opposition Labour Party, homed in on the lack of clarity.

"Every single Tory candidate making wild spending commitments should tell us precisely where they're getting that money from. Is it cuts? If so, what are they cutting?" Starmer said on Monday.

Tax cut pledges during a Conservative leadership election are nothing new, but some economists warn the lack of debate about trade-offs - during a time of economic upheaval - has echoes of past policy mistakes.

In the early 1970s, Conservative prime minister Edward Heath's "dash for growth" policy contributed to inflation spiralling out of control by the mid-1970s.

"There's a strong smell of 1972 about Tory leadership candidates promising fiscal largesse while inflation is rising," said independent economist Frances Coppola.

Newsletter

Related Articles

0:00
0:00
Close
UK Councils to Receive Sweeping Planning Powers to Ban New Vape and Betting Shops
Andy Burnham Criticises Brexit and Says Rejoining EU Single Market Remains an Option
UK Imposes New Sanctions on Russian Military Networks and Propagandists
UK Launches Nationwide Early-Release Prison Scheme
Andy Burnham Says Security Services See Signs of Iranian Involvement in RAF Fairford Incident
Manchester City Found Guilty on Premier League Financial Charges After Independent Investigation
Scottish Court to Rule on Bid to Force No-Confidence Vote Against Aberdeen Council Co-Leader
UK Bans Extra Charges for Seating Children Under 12 Beside Accompanying Adults
UK Introduces Vaping Duty and New Licensing Requirements
Greggs to Close Four UK Factories and Cut 740 Jobs
Hundreds of Prisoners Released Early as England and Wales Prisons Reach 98% Capacity
UK Unveils New Russia Sanctions Targeting War Funding and Shadow Fleet
Burnham Says There Are Strong Indications of Iranian Involvement in RAF Fairford Security Breach
Prime Minister Andy Burnham Raises Prospect of Reviewing Britain's Post-Brexit EU Relationship
Markets Price in Bank of England Rate Increases as Inflation Rises to 3.1%
UK Borrowing Costs Climb Toward 5.5% as Global Bond Sell-Off Intensifies
UK-France One-In-One-Out Migration Agreement Expires as London Seeks Alternative Measures
Southwest England Faces Flood Alerts After Heavy Autumn Storms
UK Expands Funding for Rapid Electric Vehicle Charging Infrastructure
Welsh Government Approves Funding to Upgrade South Wales Transport
Northern Ireland Tensions Rise as Orange Order Rejects Drumcree Compromise
NHS Leaders Back Early Design of Proposed National Care Service
More Than One-Third of Regional UK Universities Face Financial Deficits
UK Current Account Deficit Narrows as Cross-Border Financial Flows Remain Strong
Bank of England and FCA Issue New Rules for Stablecoins and Digital Assets
MI5 Warns UK Universities Over Research Links With Chinese Institutions
UK Energy Price Cap Rises 4% as Electricity VAT Is Temporarily Suspended
Equity Calls for UK Personality Rights to Protect Performers From AI Replication
OpenAI Pauses Advanced Model Training Following Safety Concerns
Scottish Government Proposes Replacing 32 Councils With Larger Regional Authorities
Ofgem Raises UK Household Energy Price Cap by 4% From October
UK Counter-Terrorism Police Continue Investigation After Five Arrests Near RAF Fairford
OECD Cuts UK 2027 Growth Forecast to 1%
Labour Says State Pension Triple Lock Remains Protected Through Current Parliament
Andy Burnham Pledges National Care Service With Free Social Care in England
Six Flags Permanently Shuts Landmark X2 Roller Coaster Following Safety Scandals
Metropolitan Police Rule Out Terrorism in Golders Green Stabbing Investigation
Lithium-Ion Battery Identified as Cause of Fatal Merseyside House Fire
UK Department Rejects New Sea Use Framework Due to Stakeholder Fatigue
Major Thames Water Pipe Burst Causes School Closures in London
Aldi Commits £900 Million to Expand UK Supermarket Network
Scottish Affairs Committee Warns Skills Shortages Threaten Defence Sector Expansion
Parliamentary Committee Warns Northern Ireland Budget Deadlock is Stalling Economic Growth
NHS Hospitals in England Face Severe Shortages of Essential Medications
Home Secretary Signals Major Overhaul of UK Immigration and Leave to Remain Policies
Chancellor Promises New Job Schemes Alongside Strict Fiscal Discipline
Energy Secretary Proposes Taxpayer-Funded Green Transition and National Electricity Grid
UK Government to Renationalise Avanti West Coast Railway Franchise in March
Prime Minister Andy Burnham Pledges Major Social Care and Infrastructure Reforms
Five Suspects Released on Bail Following Alleged Bomb Plot Near RAF Fairford
×