Liz Truss’ plans for tax cuts are ‘a gamble at best,’ says leading think tank

(AP)

Liz Truss’s plans for drastic tax cuts coupled with a huge government support package to cap soaring energy bills risk putting public finances on an “unsustainable path”, a leading economic think tank has warned.

The Institute for Fiscal Studies (IFS) calculated that the combination of higher spending and tax cuts means government borrowing will reach £100bn a year, more than double official forecasts last March.

With debt potentially set on an “increasing path”, the IFS said the government’s claim that lower tax rates would lead to sustained economic growth was “a gamble at best”.

IFS deputy director Carl Emmerson said: “Under the new prime minister’s plans, the fiscal targets legislated in January would be missed and while we would now enjoy lower taxes, the ever-increasing debt would ultimately prove unsustainable.”

Foreign Minister Kwasi Kwarteng is due to set out the details of the government’s plans, including how it will pay for energy price guarantees for households and businesses, in a “mini-budget” on Friday.

As well as reversing the rise in national insurance contributions and scrapping a planned rise in corporate tax, which Ms Truss has promised, it is reported that she will cut the stamp duty in a new bid to boost growth.

Despite the scale of the changes and the worsening outlook for the economy, the IFS said it was “disappointing” that the Office for Budget Responsibility would not produce a new set of economic forecasts alongside the Chancellor’s statement.

He said the final bill for the energy price cap was “highly uncertain” and, although they were working on the assumption that it could be £100bn over the next two years, it could turn out to be much higher or much cheaper.

However, the reduction in revenue from changes to national insurance and corporation tax was much clearer, costing the Treasury around £30bn a year.

At the same time, rising inflation was driving up spending on debt interest, as well as state pensions and most working-age benefits, while Ms Truss also pledged to increase defense spending. to 3% of national income by the end of the decade.

As a result, the IFS said that even after the power price guarantee is supposed to expire in October 2024, the loan would be around £100bn a year, more than £60bn more than expected. scheduled in March.

At around 3.5% of national income, that would leave indebtedness not far from double the 1.9% it averaged in the 60 years up to the 2008 global crisis.

Almost half of this increase is due to tax cuts, while if they are not implemented, the current budget is forecast to remain balanced.

The prospect of persistent deficits in the current budget and rising debt as a share of national income means major fiscal targets set in January will have been missed, the IFS said.

“Allowing debt to rise temporarily to finance one-time support packages, such as the energy price guarantee or leave scheme, in exceptional circumstances is justifiable and can be sustainable, but the same cannot be done to allow debt increase indefinitely in order to enjoy lower taxes now,” he said.

While Ms Truss and Mr Kwarteng argue that higher growth will lead to higher incomes, the IFS said the economy would need to grow an additional 0.7% a year through 2026-27 just to stabilize debt as a share of national income.

To put it into context, the IFS said it was equivalent to the difference in growth rates in the 25 years from 1983 to 2008, when the economy was expanding at an average of 2.8% a year, and the 2010s, when growth averaged 2.0%. .

“It would certainly help to find a way to somehow boost the rate of economic growth in the UK. But we must not underestimate the scale of the challenge,” she said.

“There is no miracle cure, and laying out plans backed by the idea that major tax cuts will provide a sustained boost to growth is a gamble at best.”

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