The cost of living crisis is a the key question for Conservative leadership candidates hoping to become the next UK Prime Minister. But the tax strategy proposed by the two latest Conservative leadership contenders, Rishi Sunak and Liz Truss, will not solve the problem.
Instead, we need a more comprehensive approach that supports all UK households, but especially those in poorer areas, which have been hit hardest by rising bills and slowing economic growth. Understanding how and why inflation has affected these households is an important step in evaluating the solutions proposed by the candidates.
Inflation rate in the UK
One of the main factors in the current economic situation in the UK is the high level of inflation – 9.4% as of June 2022 – outpaced the growth of wages and benefits. Although Great Britain unemployment held at 3.8% from March to May 2022, real disposable incomes (wages adjusted for inflation and after taxes and benefits) fell by recording 2.8% over the same period.
This means that work becomes less efficient defending against poverty, particularly in areas of the UK where incomes and investment are lower; where infrastructure needs updating and where the overall economic outlook is bleaker than for the rest of the country. The situation is further aggravated by the increase in taxes in 2021 the biggest tax increase (as a share of national income) in any year since 1993.
The final Tory contenders for Conservative Party leader and Prime Minister will take part in a one-on-one debate in Stoke-on-Trent on July 25. As an economist working on poverty reduction and lives in Stoke-on-Trent – one of the the most disadvantaged parts of the UK – I see the effects of the cost of living crisis every day. The tax strategies put forward by Sunak and Truss will have major implications for the areas of the UK hardest hit by the rising cost of living.
The Foreign Secretary’s tax strategy reveals that she sees inflation in the UK as “cost-led”, meaning a reduction in the supply of goods and services. With such inflation, prices are pushed to increase the cost of production and raw materials.
The current inflation situation in the UK is partly due to the supply chain issues that businesses have been struggling with to meet post-pandemic demand boom. Higher oil pricesas a result of the war in Ukraine, did not help the situation.
The farm too blame Inflation in the UK on the Bank of England increases the money supply. In addition to setting a money supply target, Truss wants to focus on increasing the production supply. Her promise to cut both personal and corporate taxes through a £30bn tax cut package criticized as inflationary by Sunak. She has not presented yet exact details plan, however.
On the other hand, the former chancellor’s proposals for economic strategy are aimed at combating demand-side inflation. This type of inflation occurs when there is too much demand for limited goods and services being produced. This causes prices to rise, which leads to inflation. This excessive demand can also be described as too much money waiting for too few goods.
Sunak intends to stick with his plan since the chancellor to increase both National insurance and corporate income tax. This will mean promotion corporate tax from 19% to 25% next spring, while offering investment aid for firms. He has too laid down a 1p cut in the basic rate of income tax in April 2024.
The ex-chancellor was criticized for the disarray of the current government monetary policy contributing to high inflation in the UK. However, before launching his campaign, the chancellor announced a multibillion-dollar support package which he said would have “minimal impact» in conditions of further growth of inflation.
How to help “abandoned” areas
The cost of living crisis reflects elements of both types of inflation. Difficulties in obtaining the materials needed to produce goods, rising wages, and rising prices for energy and agricultural commodities are all signs of inflation, which increases costs. The result was demand inflation increase in government spending during the COVID crisis and higher household spending due to savings made during a pandemic.
Inflation caused by rising costs cannot be solved by higher taxes on households, as Sunak suggested, especially since most of the inflation in this case imported, for example, by increasing energy prices. Higher taxation in this case will only hurt households that are already struggling with spending. On the other hand, Truss’ plan to cut taxes indiscriminately could worsen inflation.
Levels of deprivation in Stoke-on-Trent
This is especially true for England.”left behind» neighborhood. These districts – mainly in post-industrial and coastal parts of England – were severely injured through the cost of living crisis. More than a quarter (26.7%) of people living in the remaining areas deprived of incomecompared to 12.9% in England as a whole.
A more nuanced approach to taxation is needed if we are to help these areas in particular. The tax cuts could ease the burden on struggling households and small businesses, along with tax increases for large firms – especially those that have significant profits such as energy sector.
The 25% windfall tax introduced on oil and gas companies last May is a good example of how the next government could use business taxes to support those experiencing fuel poverty. This directly benefits the remaining areas fuel poverty is a problem for 8.8% of people, compared to 2.3% in England as a whole.
Tax incentives for investment that benefit the areas left behind should also be on the next government’s agenda. Tax cuts for firms actively investing in the UK economy would be a good start – especially for those investing in the left boroughs. This could create higher-paying jobs and spur economic growth in these communities and across the country.