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How Might the Next Prime Minister Impact Fiscal Policy?


How Might the Next Prime Minister Impact Fiscal Policy?

Whilst Brexit has understandably been the primary policy issue in the Conservative leadership election so far, some of the candidates have floated tax-cutting policies too.......

  • Michael Gove has suggested replacing VAT with a lower, simpler sales tax.
  • Boris Johnson has suggested raising the higher rate income tax threshold from £50,000 to £80,000.
  • Dominic Raab has put forward a one pence per year cut in income tax for five years.


The consequence of tax cuts appears that these possible future Prime Ministers intend to loosen the fiscal stance by utilising some of the fiscal headroom within the current official forecasts.
The current fiscal rule was introduced after the EU referendum and is looser than its predecessor, to allow flexibility to support the economy in the near term, if warranted by economic conditions. The OBR forecast at the March 2019 Spring Statement was that the fiscal headroom was £26.6 billion.

Current Chancellor, Philip Hammond, feels that there isn’t much fiscal headroom for tax cuts or spending increases. His view is that the cushion has only been created to deal with economic uncertainty for the period whilst the nature of the UK’s exit from the EU is determined. Moreover, he believes that once an outcome has been reached on our withdrawal, the fiscal policy should be tightened to return the public finances to surplus.
If, however, the new PM is one of the candidates promoting a tax cut, it implies that fiscal policy will continue on a looser path, rather than returning to the pre-referendum objective of eliminating the deficit.

The present fiscal rule is about to expire naturally and so it seems likely that the PM and his or her Chancellor will confirm their government’s medium-term fiscal strategy, including details of the new fiscal rules in either the Autumn Budget or the following Spring Statement.

Do you know how a change to tax policy will impact your business? Contact us to find out how a change in fiscal stance may affect your business.