IFS: Tax cuts “unrealistic” without reduced spending

Published by Scott Challinor on August 18th 2022, 11:11am

The Institute for Fiscal Studies [IFS] think tank has said that promises of tax cuts made by the Tory leadership candidates are “unrealistic” unless government spending is also reduced.

Foreign secretary Liz Truss has said that she would reverse the National Insurance hike and put the brakes on a planned corporation tax increase if elected to Number 10, to help stimulate economic growth.

Her rival, ex-chancellor Rishi Sunak, has said that if he were made PM, he would cut VAT on energy bills and reduce income tax by three pence before the end of the next Parliament – in late 2029.

Sunak has been clear throughout his campaign that the tax burden will be reduced once inflation is under control, and both candidates have repeatedly argued that their policies are affordable.

However, the IFS’ deputy director, Carl Emmerson, said that spending cuts would have to come into play if promises of tax cuts were to be delivered in a sustainable manner.

Emmerson said: “These tax cut promises are unrealistic unless they're going to set out detailed, deliverable spending cuts on a comparable scale.

“In reality, there will be a need to spend significantly more, especially given the pressures on households with energy bills.”

Emmerson said that the government could borrow more in the short-term to provide more support for households with the rising cost-of-living, but warned that “large, permanent tax cuts” would only stretch the public purse given the “deteriorating” outlook for the UK economy at large.

Inflation hit 10.1 per cent in July, while rising prices are continuing to limit the spending power of households as they outstrip wage increases. The Bank of England has separately warned that the UK economy will enter recession later on in the year.

The IFS’ report projected that soaring inflation would lead to more public spending on benefits and supports for public facilities such as schools and hospitals who need to pay out more for their energy bills.

It added that tax revenues would not be likely to cover the level of funding needed for this support, meaning that there would be no spare funding left to justify alleviating the tax burden on people.

The IFS conclusion comes after the Office for Budget Responsibility [OBR] had already warned that the UK government’s debt is on an unsustainable footing and spending cuts or tax increases would be required to responsibly manage public finances.

The Sunak camp says that the IFS' assessment supports the former chancellor’s fiscal policy plan and reiterated that his promises were realistic compared to those of his rival.

A spokesperson for the former chancellor said: “It (the IFS report) drives a coach and horses through Liz's economic plan. Rishi has consistently made the case that permanent, unfunded tax cuts would cause significant damage to the public finances and push inflation up higher.

“It is not credible or Conservative to spend £50 billion on tax cuts and pay for them through higher borrowing at a time of high inflation.”

A source from within the Truss campaign said that the foreign secretary would call an emergency budget to put money into people’s pockets, “cut taxes using the existing fiscal headroom” and “get debt to GDP falling within three years.”

The source added: “You cannot tax your way to growth, and business as usual will not do.”

Elsewhere this week, both leadership candidates have laid bare their intentions to progress the government’s Northern Ireland Protocol Bill if elected to Number 10, during a hustings in Northern Ireland.

Truss, who introduced the legislation to Parliament in her capacity as foreign secretary, has said that the UK government needed to be able to directly intervene with the Protocol, given the inability of the Stormont executive to function while it is in place as it is.

Stormont has been left without a power-sharing administration since the February Assembly elections, after the Democratic Unionist Party [DUP] refused to enter government as an act of protest against the Protocol.

The government’s bill if passed would give UK ministers the power to override parts of the Protocol, although the European Union and Irish nationalists oppose this, claiming that it would break international law.

However, Truss and Sunak maintain that the UK would be acting legally and have pledged to carry the legislation through and restore the executive in Northern Ireland should they succeed Boris Johnson as prime minister.

Truss said: “We are not going to get Stormont back up and running (without unilateral action).

“I've been in discussions with all the parties in Northern Ireland and I'm determined to make it happen. We will see power-sharing restored in Northern Ireland.”

Sunak has previously suggested that he would prefer a negotiated solution with the EU, but stressed that he’d do “whatever it takes to fix the Protocol”, including unilateral action if necessary.

The former chancellor suggested that as the Protocol legislation was facing parliamentary scrutiny, he’d return to the negotiating table with the EU in an effort to agree a compromise.

He also called it “sad” that the Stormont executive could not function given the current state of the Protocol, and that the Protocol therefore needed to be at the start of resolving the situation.

Photo by Philip Veater on Unsplash

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Authored By

Scott Challinor
Business Editor
August 18th 2022, 11:11am

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