I welcome both tax cuts announced by the Prime Minister for the next Parliament. I think it quite easy to answer Labour’s query, how will they be paid for? The answer incidentally will be set out in detail later this autumn when we see the next set of forecasts for spending and borrowing from this government which will give us revised base figures.
The Conservative leadership has ruled out one of the three possible ways to pay for the Income tax cuts – tax rises elsewhere. That leaves two ways to pay for them – rising revenues from economic growth, and declining public spending.
These tax cuts are not like a cut in CGT from 28% or a cut in top rate income tax from 50% or 45% which pay for themselves because they raise more revenue. There will be a substantial revenue loss from raising the tax threshold and some revenue loss by raising the 40p threshold.
The first offset to the tax cuts will be increased revenue elsewhere. People with more spending money after tax will pay more VAT, fuel duty and other consumption taxes.
The second offset will be more tax revenue of all kinds as economic growth is likely to get a stimulus from the extra private spending power the tax cuts generate. It is likely to add to confidence and activity levels.
The third offset is some decline in benefits. As more people get into work, so there will be fewer on unemployment related benefits. As more people are on higher net and gross pay, so there will be reduced payments of top up benefits to make up their incomes. A natural decline in benefit spending because people are better off will be a welcome spending cut.
We will need to see the official figures for how much each of these categories contributes. The rest will need to be done by reduced spending.
In this Parliament the deficit has been reduced whilst large tax reductions through raising the Income Tax threshold have been pushed through. A Conservative government wishes to do more of the same. I welcome any move to cut Income taxes in ways which get more people into work and reduce the need to pay people top up benefits. I want people to be better off and benefit spending to fall as a result, which is what I understand this policy to be all about.