Britain’s first double-digit inflation in more than four decades has cast doubts on the plausibility of the tax cuts promised by Liz Truss and Rishi Sunak during their leadership battle, one of the leading groups has claimed British thinkers.
Following news that the government’s preferred measure of the cost of living rose 10.1% in the year to July, the Institute for Fiscal Studies said higher inflation would lead to additional expenditure for social benefits, state pensions and debt interest.
The result of inflation five times higher than a year earlier would be weaker public finances, making it more difficult for either of the two hopefuls to replace Boris Johnson to meet their fiscal commitments, a said the IFS.
Truss, the favorite to be the next Prime Minister, has said she will reverse the rise in National Insurance contributions and not go ahead with the planned rise in corporation tax next year – with her package estimated at £30 billion. Sunak said he would cut taxes, but only when inflation is back under control.
But the IFS said that over the next financial year – 2023-24 – borrowing is likely to rise by £23bn as the government is expected to raise benefits and pensions based on a higher rate of inflation. high at a cost of £4 billion and also pay. 54 billion higher debt interest on inflation-linked bonds. Spending increases would only be partially offset by a £34 billion increase in tax revenue due to rising inflation.
The think tank said there would be further pressure, likely to run into the tens of billions of pounds, to continue supporting households struggling with higher energy bills and to compensate utilities for the impact higher than expected inflation.
In a new report published today, the IFS said Truss and Sunak must acknowledge even greater than usual uncertainty in public finances. Pressures on public services would be more acute, higher-than-expected spending seemed ‘inevitable’ and tax revenues would depend on the length and depth of the recession forecast by Threadneedle Street.
The think tank said additional short-term government borrowing was not necessarily a problem – and might be appropriate to fund targeted support, but deep permanent tax cuts on the scale being considered during the election campaign. of the Conservative Party would exacerbate “already substantial pressures” on public finances unless corresponding spending cuts are also implemented. In reality, “significant” increases in spending would likely be needed in the face of high inflation, he added.
Carl Emmerson, Deputy Director of IFS and an author of the report, said: ‘The reality is that the UK has become poorer over the past year. This makes tax and spending decisions all the more difficult. It is difficult to reconcile promises by Ms. Truss and Mr. Sunak to cut taxes in the medium term with the absence of specific measures to reduce public spending and an alleged desire to manage the nation’s finances responsibly.
Sunak’s campaign responded by saying that the IFS analysis “drives a trainer and horses” through his rival’s proposals, and that he has “constantly argued that permanent, unfunded tax cuts would cause significant damage to public finances and would push inflation up”.
The Bank of England expects inflation to fall sharply next year after peaking at over 13% in October.