Britain’s first double-digit inflation in more than four decades has cast doubt on the plausibility of tax cuts promised by Liz Truss and Rishi Sunak during their leadership battle, one of the UK’s leading think tanks has said. .
Following news that the government’s preferred cost-of-living measure rose 10.1% in the year to July, the Institute for Fiscal Studies said higher inflation would mean additional spending on social benefits, state pensions and interest. Of the debt.
The result of inflation being five times higher than a year earlier would be weaker public finances, making it difficult for either candidate to replace Boris Johnson to meet their fiscal commitments, the IFS said.
Truss, the favorite candidate to be the next prime minister, has said she would reverse the rise in social security contributions and not go ahead with next year’s planned rise in corporate tax, the package of which is estimated at £30bn. sterling. Sunak has said she would cut taxes, but only when inflation is brought back under control.
But the IFS said that in the next financial year, 2023–24, borrowing is likely to rise by £23bn, because the government would need to raise benefits and pensions in line with a higher rate of inflation at a cost of £4bn and also pay £54bn in higher debt interest on inflation-linked bonds. The spending increases would only be partially offset by a £34bn increase in tax revenue as a result of rising inflation.
The think tank said there would be additional pressure, likely in the tens of billions of pounds, to continue to support households struggling with higher energy bills and to compensate utilities for the impact of higher inflation from the expected.
In a new report released today, the IFS said Truss and Sunak needed to acknowledge even greater uncertainty than usual in public finances. Pressures on public services would become more acute, higher-than-expected spending seemed “inevitable” and tax revenues would depend on the length and depth of the recession that Threadneedle Street forecasts.
The think tank said additional short-term public borrowing was not necessarily a problem, and might be appropriate to finance targeted support, but large permanent tax cuts on the scale that were discussed during the Tory party election would exacerbate “already substantial pressures” on the public. finances unless corresponding spending cuts were also implemented. In reality, “significant” spending increases are likely to be needed in the face of high inflation, he added.
Carl Emmerson, Deputy Director of the IFS and author of the report, said: “The reality is that the UK has gotten poorer over the last year. That makes tax and spending decisions even more difficult. It is difficult to square the promises that both Ms. Truss and Mr. Sunak are making to cut taxes in the medium term with the absence of specific measures to reduce government spending and an alleged desire to manage the nation’s finances responsibly. ”.
Sunak’s campaign responded by saying that IFS’s analysis “leads a coach and horses” through his rival’s proposals, and that he “has consistently argued that unfunded, permanent tax cuts would cause significant damage to finances.” and would push inflation higher.
The Bank of England expects inflation to fall sharply next year after peaking at over 13% in October.