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Downing Street and the Treasury fear soaring prices could “spiral”, even further if a tax cut is adopted soon to help with the cost of living.
Both the Bank of England and the Organisation for Economic Co-operation and Development predict inflation will only start dropping next year.
It means that pressure to bring forward a planned income tax cut and reverse the increase in National Insurance is being resisted for now. Rishi Sunak, the Chancellor, has refused to promise personal tax cuts in his autumn Budget, only going as far as pledging help for businesses.
Conservative MPs demanding tax cuts rejected the Prime Minister’s position on Monday, warning that the slowing economy showed the importance of new measures to kick-start growth.
The UK economy shrunk by 0.3 per cent in April, the Office for National Statistics said on Monday - the second successive drop in GDP, following a 0.1 per cent fall in March.
The news fuelled fears that the UK economy could be heading into recession, just at the same time that prices are soaring - a phenomenon known as “stagflation”.
That poses a major economic challenge, because traditionally the policy moves to curb increasing prices are the opposite of those adopted to overcome stuttering growth.
Discussing calls to cut tax, Mr Johnson told LBC on Monday: “Yes, of course I understand that we need to bear down on taxation and we certainly will.”
But he said there was an “inflationary spike that we’ve got to get through right now, looking after people as we go through that. And that is what we’re going to do”.
It is one of the first times Mr Johnson has explicitly linked the timing of major tax cuts to inflation, reflecting changes in his thinking after briefings with leading UK economists.
Further explaining the Prime Minister’s thinking, a senior Government source told The Telegraph: “The more you spend, inflation spirals. We’ve got to be responsible.
“That is a huge issue. We can’t do anything that inflames that further. That’s why everything we’re focused on is about growing the economy.”
The cost of living crunch is due to intensify in the coming weeks as petrol prices continue to rise, recently hitting £100 to fill up an average family car’s tank.
Interest rates are expected to rise to a 13-year high on Thursday, when the Bank of England decides on rates - creating new mortgage pressure.
The impact of the 1.25 per cent National Insurance rise is still only just being felt, having come into effect in April.
On Monday, it was announced that David Buttress, the founder of the Just Eat food delivery service, has been appointed the Government’s new "cost of living tsar", to help convince businesses to give families more cheap deals.
The Bank of England forecasts that inflation will peak at 10.2 per cent in the fourth quarter of 2022, before falling to 9.3 per cent in the first quarter of 2023 and 6.7 per cent in the second quarter. The OECD, an international body, has similar predictions for the UK.
But there is no guarantee that rising prices, triggered by supply issues from Covid lockdown and exacerbated by Russia’s invasion of Ukraine, will not continue for longer than forecast. Previous Bank of England forecasts predicted inflation would be falling this year.
David Davis, the Tory MP and former Brexit secretary, rejected the argument that tax cuts should wait until inflation has started to fall.
Mr Davis told The Telegraph: “There’s this strange new argument coming out that somehow taxation is a way of defeating inflation. High tax does not defeat inflation - it makes the impact of it more miserable for the ordinary family.
“Secondly, we will be facing stagflation, not inflation. The best way to deal with that is to get the growth rate up, which is another argument for lower taxes. Tax cuts should come before the spike in inflation.”
The Prime Minister repeatedly talked up his determination to cut taxes last week, as he sought the support of Tory MPs ahead of a confidence vote in his leadership.
In a letter to all Conservative MPs ahead of the vote, Mr Johnson said “you cannot tax your way into growth” and “we will of course devote all our energy to reducing … the tax bill”.
He made similar comments in a face-to-face address to the 1922 Committee of Tory backbenchers. Mr Johnson ended up winning the no confidence ballot of Tory MPs by 211 votes to 148 votes.
The Prime Minister then used a reset speech on Thursday to call the tax burden - set to hit its highest point in 70 years - an “aberration”, saying he wanted a reduction “sooner” rather than “later”.
Yet Mr Johnson has declined to name a single new tax cut he is considering.
'Isn't the big tax rise bound to make things worse?'
Sir John Redwood, the Tory MP and former Welsh secretary, argued in the House of Commons that a tax cut could help those whose incomes have been undercut by rising prices.
Sir John asked: "Why is the UK Government the only advanced country government making a big increase in the tax burden and next at exactly the same time when there is very necessary monetary tightening to control the inflation, and a huge hit to net incomes from that inflation itself? Isn’t the big tax rise bound to make things worse and slow the economy too much?"
Separately Anthony Mangnall, the Tory MP for Totnes, warned that low pay was driving fishermen out of business.
He said: “Right now, fishermen in Brixham are deciding to lay up their vessels because of average takings per day of £32 for their entire day's work. If we do not step in now, our fishermen across the United Kingdom will lay up.”
No new decisions on taxation are expected until the Budget this Autumn.
Government ministers note that the increase in the National Insurance thresholds will kick in next month, in a policy that will reduce tax bills for millions of households.
Reform UK pledge to cut taxes
Meanwhile, Reform UK, which is led by Richard Tice and was originally founded as the Brexit Party, announced a stimulus plan on Monday which it said would provide a £74 billion economic stimulus.
Accusing Mr Sunak of a “Corbyn solution” and “classic socialist measures”, Reform pledged to cut income tax for Britons earning less than £20,000 per year, scrap VAT on energy bills, drop “green” environmental levies and reduce fuel duty by 20p per litre.