Jeremy Hunt is continuing to fend off pressure to cut taxes at Tory Conference, claiming yesterday that they would “compromise” the fight against inflation. Left-wingers are known to argue that tax cuts are inflationary but the facts don’t bear out. Inflation is a monetary phenomenon.
When taxes are cut people will buy more goods and services at the already elevated prices. Meanwhile, wealthier families save the extra money to invest. Disposable income has not been shown to affect inflation. Even the £10 billion cost of living package had almost no effect.
Tax cuts that stimulate production, for example in corporation tax, will be anti-inflationary. As inflation is caused by a growing amount of money chasing a reducing amount of goods and services, then tax cuts that stimulate production will bring the level of inflation down by increasing supply. It’s basic economics… the main reason we don’t have tax cuts is because the government doesn’t want to cut spending.