Promises of tax cuts made by the Conservative leadership candidates are looking increasingly implausible, experts have warned.
The Institute for Fiscal Studies (IFS) said “permanent tax cuts” could exacerbate pressures on the public purse, but suggested short-term Government borrowing to support struggling households may be a necessary step for the next prime minister.
The warnings come as basic goods have increased in price, with inflation shown to have reached 10.1% in July, while energy costs are predicted to continue to increase in the autumn.
Both Liz Truss and Rishi Sunak have promised tax cuts as part of their pitch to succeed Boris Johnson.
But IFS deputy director Carl Emmerson, author of the research institute’s latest report, said: “The reality is that the UK has got poorer over the last year. That makes tax and spending decisions all the more difficult.
“It is hard to square the promises that both Ms Truss and Mr Sunak are making to cut taxes over the medium term with the absence of any specific measures to cut public spending and a presumed desire to manage the nation’s finances responsibly.”
New research by the IFS predicts high inflation and interest rates will push up public spending, including on benefits and pensions.
This, combined with weak economic growth, is likely to offset the effect of an expected increased tax intake.
That is before any of the tax cuts or additional support measures promised by the two Tory leadership campaigns are enacted, the IFS said, which it claims could disrupt the Government’s plans to manage the economy.
Its report said: “The two candidates for prime minister need to recognise this even greater-than-usual uncertainty in the public finances. Additional borrowing in the short term is not necessarily problematic – and indeed may be appropriate to fund targeted support.”
It added: “Only last month the OBR (Office for Budget Responsibility) warned that the public finances are already on an unsustainable long-term path: large, unfunded, permanent tax cuts would only act to make this problem worse.”
In her pitch to Conservative members, Ms Truss has promised to scrap the April increase in National Insurance and a planned rise in corporation tax.
The Foreign Secretary also said she would do more to stimulate investment through low tax zones like freeports.
At the latest Tory leadership hustings in Belfast, Ms Truss stood by her tax-cutting proposals when asked how they would match up with Government plans to service public debt.
She said the UK has the “highest levels of tax for 70 years”, adding: “It is my view that if you put taxes up too high, you actually get less revenue in.”
Ms Truss warned it would be “harder to pay the deficit off” if the UK went into a recession and claimed high taxes are “potentially choking off growth”.
A Truss campaign source, discussing the warning from the IFS, said that as prime minister, Ms Truss “would use an emergency budget to kickstart her plan to get our economy growing and put more money into the pockets of hardworking people”.
“Liz will cut taxes using the existing fiscal headroom and will get debt to GDP falling within three years. You cannot tax your way to growth, and business as usual will not do.”
Ms Truss’s tax commitments have been rubbished by Mr Sunak, who claims they will not help pensioners and people on “very low incomes” with rising energy bills.
A Sunak campaign spokesman said the IFS analysis “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.”
The former chancellor has proposed cutting VAT on fuel bills to help struggling households as an immediate cost-of-living support measure, as well as promising a more long-term aim of cutting income tax.
At the Belfast event, Mr Sunak said he “desperately” wants to “deliver tax cuts” as he reiterated his proposals to reduce missed NHS appointments.