LIZ Truss’s plans to slash taxes will lead to a £30bn black hole in Britain’s finances, according to a new analysis by the Institute of Fiscal Studies.
The think tank warned that these cuts as well as the government’s cap on energy prices for homes and businesses, and campaign promises made by the Prime Minister during the Tory leadership contest will ultimately lead to borrowing hitting £100bn a year - £60bn more than predicted in last March’s official forecast.
The Prime Minister’s hopes of bringing the debt down through substantially higher economic growth as a result of cutting taxes “would be a gamble, at best.”
The warning came as Ms Truss told bosses of American multinationals of her ambition to “simplify” Britain’s taxes.
The Prime Minister told leaders of firms including Google, Microsoft and JPMorgan Chase during a New York meeting that she wants “lower, simpler taxes” to attract businesses to Britain.
“We want the City to be the most competitive place for financial services in the world, and we see that as a key part of the levelling up agenda, because when we unblock capital, that capital will be used across the UK to make every industry become more productive and competitive.”
Ms Truss said Kwasi Kwarteng will set out “a series of supply side reforms” in his mini budget on Friday.
The new Chancellor is also expected to deliver on the Prime Minister’s promises to reverse the rise in National Insurance and scrap a planned hike in corporation tax.
Unlike a full budget, Friday’s “fiscal event” means that the government does not need to ask the independent Office for Budget Responsibility to produce forecasts for the economy and the public finances.
The IFS said this was “disappointing” given the last report produced by the OBR was back in March, before energy prices and inflation soared “well beyond what was expected.”
Their paper, published on Wednesday, is an attempt to fill that gap. It says there are still questions over the financial impact of some of the Truss administration's major interventions.
They say the sheer scale of this spending, alongside the cuts to taxes, is “unsustainable.”
The report says the cost of the Energy Price Guarantee is “highly uncertain not least because the eventual cost will depend on the path of energy prices and, relatedly, whether it is extended in some form.”
However, if, as the government suggests the scheme does run for two years, it will “cost well over £100bn.”
“It could be much more expensive and end up running for more than two years – or much cheaper than we assume,” they add.
They added that the cost of reversing the recent rise in rates of National Insurance Contributions, and cancelling next April’s planned large rise in the rate of corporation tax, is “far more certain”.
The report states: “Together Ms Truss’s tax commitments, if carried out in full, would lead to revenues being about £30bn a year lower than they would otherwise have been.
“Since these are large and permanent measures they also matter more for the long-run health of the public finances than the eventual cost of the Energy Price Guarantee.”
The IFS says that higher inflation will also “push up spending on debt interest, state pensions and most working age benefits” while spending on public services is set in cash terms, and “therefore does not automatically adjust in the light of increased inflation.”
That means that an additional £18bn would “need to be found in each of the next two years to restore public service spending plans to the real-terms generosity that was intended when the plans were set.”
The think tank also says the commitment by the Prime Minister to increase defence spending to 3% of national income by the end of the decade, could ultimately mean that “borrowing will end up higher.”
They forecast that even once the Energy Price Guarantee ends in October 2024, borrowing will still run at about £100bn a year, almost half of which would be down to the new tax cuts.
The report says this would be around 3.5% of national income. They compare it to the 1.9% of national income that borrowing averaged over the 60 years prior to the global financial crisis, “when growth prospects were considerably higher.”
“Without new tax cuts the current budget would have been forecast to remain in balance,” the IFS said.
Isabel Stockton, Research Economist at IFS and an author of the research, said: “With so much changed since March the new Chancellor should have asked the Office for Budget Responsibility to publish its latest forecasts on Friday.
"These would have shown that a combination of a weaker outlook for the economy and the substantial tax cuts that Liz Truss has committed to will lead to more borrowing and more debt.
“There is much uncertainty, but even once the substantial Energy Price Guarantee has expired in October 2024 borrowing could still run at about £100 billion a year in the mid-2020s – more than £60 billion a year higher than forecast in March.
“Borrowing at this level – almost double the share of national income seen on average between the second world war and the global financial crisis, when growth prospects were much stronger – would see debt continue to rise as a share of national income.”
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