iz Truss’s plans for swingeing tax cuts alongside a massive Government support package to cap soaring energy bills risks putting the public finances on an “unsustainable path”, a leading economic think tank has warned.
The Institute for Fiscal Studies (IFS) has calculated that the combination of higher spending and tax cuts means Government borrowing is set to hit £100 billion a year – more than double the official forecasts last March.
With debt potentially set on an “ever-rising path”, the IFS said the Government’s claim that reducing tax rates would lead to sustained economic growth was “a gamble at best”.
Under the new Prime Minister’s plans, the fiscal targets legislated in January would be missed and while we would get to enjoy lower taxes now, ever-increasing debt would eventually prove unsustainable
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 get to enjoy lower taxes now, ever-increasing debt would eventually prove unsustainable.”
Chancellor Kwasi Kwarteng is due to set out details of the Government’s plans, including how it will pay for the energy price guarantee for households and businesses, in a “mini-budget” on Friday.
As well as reversing the hike in national insurance contributions and scrapping a planned increase in corporation tax, which Ms Truss has promised, it has been reported he will cut stamp duty in a further attempt to drive 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 be producing a new set of economic forecasts alongside the Chancellor’s statement.
It said the final bill for the energy price cap was “highly uncertain” and while they were working on an assumption that it could be £100 billion over the next two years, it could turn out to be much higher or much cheaper.
The reduction in revenue from the changes to national insurance and corporation tax however was much clearer, costing the Exchequer around £30 billion a year.
At the same time rising inflation was pushing up spending on debt interest as well as state pensions and most working age benefits, while Ms Truss has also pledged to increase defence spending to 3% of national income by the end of the decade.
As a result, the IFS said that even after the energy price guarantee is assumed to have expired in October 2024, borrowing would be running at around £100 billion a year – more than £60 billion higher than was forecast in March.
At around 3.5% of national income, that would leave borrowing not far off double the 1.9% it averaged in the 60 years to the global crash in 2008.
Almost half this increase would be due to the tax cuts – while if they do not go ahead the current budget would be forecast to remain in balance.
Setting plans underpinned by the idea that headline tax cuts will deliver a sustained boost to growth is a gamble, at best
The prospect of persistent deficits in the current budget and debt rising as a share of national income means both the main fiscal targets set in January will have been missed, the IFS said.
“Allowing debt to rise temporarily to finance one-off packages of support, such as the energy price guarantee or the furlough scheme, in exceptional circumstances is justifiable and can be sustainable, but the same case cannot be made for allowing debt to rise indefinitely in order to enjoy lower taxes now,” it said.
While Ms Truss and Mr Kwarteng argue that higher growth will lead to higher revenues, the IFS said the economy would have to grow by an additional 0.7% a year to 2026-27 just to stabilise debt as a proportion of national income.
To put it in 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 was averaging 2.0%.
“Finding a way to somehow boost the UK’s rate of economic growth would undoubtedly help. But we shouldn’t underestimate the scale of the challenge,” it said.
“There is no miracle cure, and setting plans underpinned by the idea that headline tax cuts will deliver a sustained boost to growth is a gamble, at best.”