The Telegraph, July 18, Roger Bootle
The Conservative Party leadership campaign has turned into a bidding war as each candidate competes to propose the most striking tax cuts. This may be unedifying and, indeed, some commentators regard it as an exercise in pure fantasy. But at least it has brought the subject into the open, in contrast to the silent, sliding acceptance of higher spending and accompanying higher tax rates that has characterised the last three years.
The former chancellor, Rishi Sunak, says that tax cuts would be inflationary and he would only introduce them when inflation is brought under control. But are tax cuts inflationary?
The answer is “it all depends”. The current inflation is driven by two forces: the first is the growth of aggregate demand pressing against a (probably reduced) supply capacity. The second is a series of price hikes originating from outside the UK, mainly associated with the war in Ukraine and continuing disruption as a result of Covid and its aftermath. The interaction between these two is contributing to a developing wage-price spiral.
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