Tax cuts to be announced on Friday are likely to push UK borrowing and debt to unsustainable levels, a leading economic think tank has warned.
The UK will spend billions to help households and businesses with energy bills, but tax cuts will have a longer-term impact on public finances, the Institute for Fiscal Studies has said.
Even after this support ends, the UK will continue to borrow £100 billion a year, it says.
Tax cuts are a “gamble” that may not pay off, the IFS warned.
In Friday’s mini-budget, the government is expected to reverse an increase in social security and scrap a proposed corporate tax hike that could cost £30bn.
The Treasury has declined to release a forecast of the UK economic outlook along with this Friday’s mini-budget.
The IFS said it was releasing its own study, outlining “how much red ink” would be added to the country’s fiscal position as a result of new Prime Minister Liz Truss’ strategy.
Carl Emmerson, deputy director of the IFS and author of the study, said the government’s tax cut plans meant borrowing would remain high even after the cost of subsidizing energy bills disappeared, increasing overall debt.
“While we would now enjoy lower taxes, the ever-rising debt would eventually prove unsustainable,” Mr Emmerson said.
“The government chooses to increase borrowing as soon as it becomes more expensive in a growth game that may not pay off.”
The pace of growth needed to keep public debt at sustainable levels is not impossible, but requires “good luck over a long period of time or a concerted shift in policy direction,” he added.
The new prime minister has outlined her plans for the economy, arguing that tax cuts will “boost corporate-led growth and investment”.
She said she wants the economy to grow at an average of 2.5% a year.
The IFS said finding a way to boost the UK’s economic growth would “undoubtedly help” but the Government should not underestimate the scale of the challenge.
In March it was forecast that borrowing will be well below £40bn by the mid-2020s.
At around 3.5% of national income, borrowing of £100bn is high by historical standards. In the 60 years before the financial crisis, borrowing averaged 1.9% of national income, will increase borrowing by hundreds of billions of pounds over the next two years, although fluctuating wholesale prices mean exact costs are difficult to estimate. However, this borrowing can be justified as it is temporary, according to the IFS.
The proposed tax cuts would result in government revenue being around £30bn lower a year than it would have been, the IFS calculated.
Because the tax cuts are permanent, they are more important to the health of public finances in the years to come, the IFS said.
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