UK’s mounting debts unsustainable if sweeping tax cuts go ahead, warns IFS | Government borrowing
Britain’s mounting debts will be unsustainable if the government presses ahead with sweeping tax cuts in a mini-budget on Friday, according to the Institute for Fiscal Studies thinktank.
Fuelling concerns that the UK’s precarious financial position will spark a run on the pound, the chancellor, Kwasi Kwarteng, is expected to reverse an increase in national insurance payments and cut corporation tax at a cost to the Treasury of £30bn.
Kwarteng, who will announce a review of his fiscal rules to allow the government to borrow more, is also expected to give away billions of pounds by cutting stamp duty on house purchases and confirm a multibillion-pound rise in the defence budget to support the war in Ukraine and boost growth.
These measures will be in addition to a freeze on energy prices for consumers and businesses that could cost more than £150bn over two years.
The IFS report said: “Recent rapid increases in the cost of debt interest highlight the risks of substantially and permanently increasing borrowing and putting debt on an ever-increasing path.”
“There is no miracle cure, and setting plans underpinned by the idea that headline tax cuts will deliver a sustained boost to growth is a gamble, at best,” it added.
Sterling fell to $1.138 – down from $1.22 last month and $1.40 last year – as traders switched to buying the dollar in advance of Friday’s mini-budget.
Analysis by the IFS showed promises to cut taxes and increase spending would push government borrowing to £100bn even if the energy crisis abated next year – £60bn above previous estimates.
Extra spending on pensions and benefits, which are linked to inflation, and an estimated £18bn hole in public sector budgets, which is likely to increase once higher energy bills are taken into account, will add to the government’s financial commitments, it said.
Carl Emmerson, an IFS deputy director, said he was concerned that the government was choosing to ramp up borrowing just as it was becoming more expensive to do so.
He said government borrowing would miss the Treasury’s existing budget targets legislated in January, leading to ever-increasing debt that “would eventually prove unsustainable”.
Kwarteng is expected to argue that extra borrowing will generate economic growth of 2.5% over the next decade, compared with a previous forecast of 1.5%, lifting tax revenues above the cost of tax giveaways.
As part of his plan to kickstart growth, the chancellor is expected to propose the creation of a network of 12 low-tax, low-regulation investment zones.
The announcement, which is expected to take deregulation further than the post-Brexit freeports set up by Boris Johnson’s government, will be part of a package that will also include a relaxation of planning laws in the zones.
Emmerson said the new growth targets set by Kwarteng were not impossible to meet but “would require either a great deal of luck over a long period or a concerted change in policy direction. One cannot simply assume oneself to fiscal sustainability.”
The independent Treasury forecaster, the Office for Budget Responsibility, has previously stated that there is no evidence tax cuts can “pay for themselves” through higher levels of growth.
Sarah Olney, the Liberal Democrat spokesperson on the Treasury, business and industrial strategy, said: “This government has lost all sense of fiscal responsibility. Future generations will be paying off the Conservatives’ debt for years to come with no guarantee of economic growth.”
In August, the public sector borrowed £11.8bn, higher than City forecasts of £8.8bn and almost twice the amount estimated by the OBR earlier in the year.
The IFS said an increase in interest rates by the Bank of England on Thursday would push the level of spending on debt interest payments higher.
Inflation has also increased the cost of servicing government debt after an increase in the proportion of bonds sold by the Treasury linked to the retail prices index (RPI).
The consumer prices index was 9.9% in August, while the RPI was above 12%.
The OBR was blocked by Kwarteng from assessing the impact of tax cuts on the economy’s ability to grow and the likely increase in the government debt interest bill.
Mel Stride, a former Tory minister who chairs the Treasury select committee, said it was “vital” that the OBR be allowed to put the Treasury’s figures through its own calculator to calm jittery financial markets.
The IFS said it was disappointed the OBR had been blocked from providing an update to its spring forecast.
Criticisms of Kwarteng’s plans to change stamp duty without measures to increase the supply of housing came from left and right of the political spectrum. Robert Colvile, the director of the free market Centre for Policy Studies thinktank, said greater supply, rather than tax cuts alone, would boost house sales and economic growth.
Stamp duty receipts hit £10.6bn in the first eight months of the year, according to the latest HM Revenue and Customs data.
Torsten Bell, the former Labour party adviser who runs the Resolution Foundation thinktank, said: “There’s a strong case for reform. Stamp duty is a pretty bad tax – especially at high levels – that impedes mobility.
“[But] a general stamp duty cut will raise house prices and principally benefit wealthier households in [the] south-east.”