Liz Truss’ plans to cut taxes would cost at least £30billion and are “likely” to break existing tax rules, an influential think tank has said.
Liz Truss has pledged to freeze the corporate income tax and reverse the 1.25% increase in Social Security.
She said the tax cuts are “affordable within our current tax rules.”
The Institute for Fiscal Studies says the contest is a “real choice” as Rishi Sunak’s plans push overall taxes to a 70-year high.
The fiscal rules, introduced by Rishi Sunak as chancellor, oblige the government not to borrow to fund current expenditures (as opposed to investments) and to reduce public debt as a percentage of national income after three years.
Successive chancellors have established rules to demonstrate their commitment to responsible stewardship of public finances.
Mr Sunak is broadly continuing the plans he laid out in office, with a warning of “fairytale” economies and the promise of future tax cuts once inflation is tamed.
Liz Truss, the other candidate still in the running, has tried to make a clear distinction between herself and Mr Sunak by promising tax cuts from “day one”, including:
- Health and Social Security Reversal – a 1.25% increase in Social Security
- Cancellation of a planned increase in corporate income tax from 19% to 25%
- Suspension of the “green electricity levy” added to energy bills.
“This is a clear change of direction, at least in the short term,” says Robert Joyce, deputy director of the think tank Institute for Fiscal Studies. “What we have yet to hear so much about is the implications of this for what she would do with spending and her strategy for future public finance management.”
The IFS says it has not been able to calculate a total cost for Ms Truss’ plans as some are not yet fully spelled out, notably the measure to remove levies on invoices.
Fiscal rules leave room for tax cuts. That amounts to around £30 billion, according to current forecasts by the government’s spending watchdog, the Office for Budget Responsibility.
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But those projections are subject to “huge uncertainty,” notes the IFS — with higher-than-projected inflation likely to put upward pressure on public spending, such as B. the wages of employees in the public sector.
And given that Liz Truss’ plans are projected to be worth at least $30 billion.
Ms Truss told BBC Radio 4’s Today Program that “the tax cut plans … are affordable under our current tax rules so three years later we would still see the debt coming down.”
Arguing that tax cuts would boost growth, she said, “What I want to do is increase tax revenues through economic growth, not stifle growth through tax increases.”
While the growth could partially offset the impact of some tax cuts, like the £17bn cost of scrapping corporate tax changes, it would not fully cover them, says the IFS.
“Certainly, tax cuts can be a way to spur economic growth, and debating that and broader supply-side reforms that could boost growth would be a very healthy feature of leadership competition,” says Joyce.
“But very few tax cuts pay off, and those Ms. Truss is currently outlining would certainly be no exception.”
As chancellor, Rishi Sunak introduced the two key taxes Ms. Truss wants to scrap — the increase in Social Security and the forthcoming increase in corporate income tax.
His most recent budget brought the tax burden to its highest level since the 1940s, at 36.3% of national income.
In an article for the Telegraph newspaper today, he argued that “the best way to achieve economic growth is to cut taxes and cut red tape” but this can only be achieved on “a basis of low inflation and sound public finances”.
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