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Slashing UK taxes at this time will be a mistake:IMF

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Slashing UK taxes at this time will be a mistake:IMF
18 Jul 2022
6 min read

News Synopsis


Several candidates for the leadership of the Conservative Party have pledged to lower taxes, but a top International Monetary Fund (IMF) official has cautioned that it might be preferable to raise taxes instead.

Tax cuts financed through debt, according to Mark Flanagan, head of the Fund's UK team, would be a mistake at this time. The heated discussion on tax cuts has been revived by the leadership contest.The urgency to address the skyrocketing expense of living is increasing.

Rishi Sunak, the previous chancellor, has opposed tax cuts, while other candidates have made bold promises, such as lowering the base rate of income tax and further lowering fuel charge. Tax reductions may provide some comfort to families who are struggling to pay for the highest rise in food and energy costs in decades.

The UK may see the slowest growth and most excruciating inflation of any G7 country in 2023, according to the IMF, in part because of its reliance on fossil fuels, a major cause of inflation. Tax cuts, according to Mr. Flanagan, could be incorrect and possibly increase inflation by bolstering expenditure.  He asserted that tax revenue may be used to finance long-term-investment in the nation.

Since the financial crisis of 2007, the UK's economy has grown at a slower rate than many of its competitors, according to many experts, posing serious problems.

This gap, according to Torsten Bell of the Resolution Foundation think tank, has "widened inequality" ever since. According to him, the poorest households in France are now 25% wealthier than their counterparts in the UK, making UK households less able to withstand the present cost of living shock.

Nigel Wilson, the chief executive of Legal & General, is one of many who thinks that the UK's persistent lack of investment is the cause of its longer-term underperformance. "I think the UK is full of potential, but we've had massive underinvestment for 30, 40 or 50 years in skills, in infrastructure… as a consequence we're a low wage, low productivity, low growth economy, fraught by political infighting. "

The IMF's Mr Flanagan said public money would be better channelled into projects that focus on sustained long-term economic prosperity - and that might need higher taxes.

"The UK does have a below-average tax ratio relative to the rest of the Organisation for Economic Co-operation and Development. You can't have it both ways," he said.

Investment in the private sector has also slowed. When Philip Hammond served as chancellor, Karen Ward, the top market strategist at the bank JP Morgan, advised him. She stated a fall in investment became particularly apparent from 2016 onwards. Mr. Flanagan of the IMF proposed that addressing the current controversy over post-Brexit trading in Ireland might assist boost investment.

 

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