On Tuesday night a televised leadership debate between Jeremy Hunt and Boris Johnson, the candidates competing to be the next Conservative leader and prime minister, took place on ITV. This article looking at the facts behind their claims is a collaboration between Full Fact, the Institute for Government and the Institute for Fiscal Studies. The article was originally published on ITV News.
The cost of the candidates' tax pledges
Both candidates, one questioner said, were “prioritising tax cuts for business and the rich.” It’s true that one of Boris Jonson’s pledges is a promised cut in income tax for those with incomes over £50,000. This benefits the highest income 8% of adults.
Mr. Johnson defended this on the basis that “too many people are being dragged into the higher rates” of income tax. The number of people paying higher rate tax in England, Wales, and Northern Ireland in the early 1990s was about 1.5 million; by 2019-20 will have risen to just under 4 million. Boris Johnson’s plan (to raise the threshold for paying the higher rate of income tax to £80,000 per year) would cut that number by about two-thirds to 1.3 million.
Jeremy Hunt, meanwhile, has promised cuts to corporation tax - cutting it to 12.5% (from 19%) would cost around £13 billion per year in the short term, though somewhat less in the long term. Ultimately corporation tax is paid by some combination of consumers, workers, and shareholders, and the distributional consequences of it are not clear.
Jeremy Hunt defended this plan by saying it would stimulate growth - and claimed that if the country grew at 3%-3.5% the government would have “an extra £20 billion” to spend.
There are several points about this. First, cutting corporation tax might boost growth, but there’s little reason to believe that a corporation tax cut alone would increase growth to that level. The exact impacts are hard to predict, but as an example, in 2013 HMRC estimated that cutting the rate from 28% to 20% (between 2010 and 2016) could increase GDP by 0.6-0.8% after 20 years.
Secondly, Jeremy Hunt’s tax cuts would reduce the amount of tax raised in the first place, so taxes generated from any GDP growth would have to make up for that first before new money could be spent. In spite of the uncertainties in predicting costs, cutting corporation tax would almost certainly cost more than it makes for the Treasury, so this alone is unlikely to produce any extra money to spend.
Thirdly, even if 3%-3.5% growth were achieved, would this raise £20 billion? It’s difficult to measure this accurately, but we can make an estimate. GDP in 2019-20 is expected to be about £2.2 trillion, and is expected to grow in real terms by 1.5% next year. If that growth rate was instead 3.5%, that would mean about £44 billion more GDP. At the moment tax makes up 37% of GDP. If that stayed the same - and the GDP growth didn’t change spending - that would mean about £16 billion more available for the government in tax.
Both candidates have proposed increasing the point at which workers start paying National Insurance Contributions. This would cut taxes for low earning workers (anyone earning over £8,632 per year), but it would have the biggest impact on middle to high income households - partly because poorer households are less likely to be in work. Jeremy Hunt suggested that he wants to raise the point at which workers pay NI Contributions to at least £12,000 per year; raising it to £12,500 would cost at least £11 billion per year.
Brexit - can parliament stop no deal?
As expected, Brexit dominated much of the debate. One point of contention between the candidates was when Jeremy Hunt said that “Parliament took no deal off the table at the end of March”, while Boris Johnson insisted that “Parliament has just resisted the temptation to vote down no deal”.
The fact is that parliament alone cannot prevent a ‘no deal’ Brexit, according to the House of Commons library.
It says that no deal can only be avoided if the UK unilaterally revokes Article 50, if parliament passes legislation to approve and ratify a Withdrawal Agreement, or if Parliament instructs the Prime Minister to ask for another extension to the negotiating deadline with the EU, as it did in March, but this requires the EU to agree.
As for Mr Jonson’s claim, on 9 July MPs largely rejected key amendments to the bill designed to give Parliament a route to stop ‘no deal’ in October. These amendments would have required the government to report on what progress has been made towards the formation of an Executive on Northern Ireland every two weeks from 9 October until 18 December. The House of Commons would have had to vote to approve these reports.
While MPs approved the need for the Government to report regularly, they rejected the amendment requiring Parliament to have a vote on them, which was critical to give them a route to stop no deal. But even if successful, these amendments would not have ruled out no deal on their own.
Can we have a free trade agreement with no deal?
Boris Johnson said that “we will sign a free trade agreement after we come out and deal with the Irish border in its proper place.”
There’s no guarantee there would be a free trade agreement after no deal. The EU have said they won’t negotiate unless the backstop is accepted, and it’s not clear the Northern Irish border question could be dealt with along with the future relationship rather than as a prerequisite in order for talks to proceed.
The two then got into a bit of a row over Mr. Johnson’s previously stated plan to (in Jeremy Hunt’s words) “avoid tariffs through something called... Article 24 of GATT.”
It is very unlikely that article 24 of the WTO’s General Agreement on Tariffs and Trade (Gatt 24) can be used to avoid tariffs. An interim “plan and schedule” would need to be agreed with the European Union before the UK leaves - in other words, it would need a deal of some kind.
The WTO Director General, Roberto Azevêdo has said: "Article XXIV of the GATT is simply the provision of global trade law under which free trade agreements and customs unions are concluded... If there is no agreement, then Article XXIV would not apply, and the standard WTO terms would."
We’ve written more about this issue here.
The Financial Times reported on 23 June that guidance from the Attorney General Geoffrey Cox’s office in January said it would be a “prima facie breach of WTO law” for the UK to maintain zero tariffs for the EU whilst charging other countries import duties, which a “standstill” implies. Mr Cox did not comment on the report.
Would Theresa May’s deal have effectively kept us in the single market and customs union?
Boris Johnson said at one point that “the present withdrawal agreement effectively keeps us in the single market and customs union”
The Withdrawal Agreement sets only the UK’s terms of exit. The future trading relationship with the EU would need to be negotiated once the UK has left.
But if the two sides failed to agree a future relationship, the Irish backstop - part of the Withdrawal Agreement - would come into force.
The current Irish Backstop contains a customs union between the UK and EU, but the UK would be outside of the EU’s Single Market. Northern Ireland would, however, remain aligned to the rules of the single market necessary to avoid a hard border on the island of Ireland.
Were we really ready for no deal in March?
Boris Johnson insisted at one point that the Uk had been “virtually ready for no deal on March 29”
The issue here is that we don’t know how ready we were for ‘no deal’ in March, because relatively little information around preparedness has been made public.
The Cabinet Secretary, Mark Sedwill, has said that the Government’s plans ‘were in pretty good shape’.
But in March the Government hadn’t passed all the laws it needed to. Only nine out of a target of 40 EU trade deals had been replicated.
As of February 2019, a government report found that fewer than 20% of relevant businesses had applied for an EORI number, which is needed to export goods in a no deal scenario. The report describes this as “one of the most basic and straightforward parts of the process most businesses would need to undertake to prepare for no deal”.
We’ve written more on this here.
Update 10 July 2019
We've added more analysis of Jeremy Hunt's claim that his proposed corporation tax cut would stimulate economic growth and therefore raise more money for public spending.
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