Conservative leadership candidate Liz Truss’ plan to bring in immediate tax cuts is likely to push up prices and risks a return to 1970s-style inflation, top economists have warned.
The foreign secretary has pledged to bring in tax cuts of at least £30bn if she becomes prime minister, claiming on Thursday: “My tax cuts will decrease inflation.”
Vowing to take on Treasury “orthodoxy” and the economic consensus, the new favourite in the Tory contest insisted that her plan to cut taxes was “not a gamble” and would not drive up soaring inflation even further.
However, Dr Jo Michell, associate professor of Economics at UWE Bristol, told The Independent that Ms Truss was wrong to claim tax cuts would bring in inflation down.
“The tax cuts she’s proposing are more likely to be inflationary, so on balance of probability her comments are false,” he said. “It’s certainly a gamble – saying the plan has no risk [of increasing inflation] is ridiculous.”
Financial economist Frances Coppola said there was good chance Truss’ plan could “backfire” and make Britain’s economic situation worse. “These tax cuts are likely to be inflationary in the short-term,” she told The Independent.
The analyst compared Truss’s tax-cutting policy resembled Tory prime minister Edward Heath’s as part of his “dash for growth” in the early 1970s.
Coppola said the Health plan contributed to inflation spiralling out of control by the mid-1970s. “Liz Truss is using the exactly the same argument – that inflation will fix itself if we get the economy growing.”
Truss has said rival Rishi Sunak had pushed Britain in the “wrong direction” on taxation, and has promised to reverse his National Insurance and corporation tax rises, as well as cutting green levies on energy bill.
She admitted on BBC Radio 4 Today’s programme that her plan would cost at least £30bn a year. About if it would cost as much as £38bn, as some have estimated, Truss said: “I’d say that’s slightly high but it’s around that figure”.
On her plan to cut taxes immediately and allow borrowing to increase, she said: “It’s not a gamble, it’s an economic reality that the higher taxes you have the more growth is choked off.”
She also condemned the “orthodoxy” of the Treasury and the opinions of many leading economists had failed to deliver growth. “We need to do something different in order to get growth going, in order to put money in people’s pockets.”
Asked to name leading economists who agreed with her, Truss named the right-wing Brexiteer Patrick Minford – who forecast in 2017 that a hard Brexit would boost Britain’s GDP by 6.8 per cent, or around £135bn a year.
Dr Michell said he was “alarmed” by Truss pointing to Patrick Minford as an economic ally – describing the Brexiteer who forecast as 6.8 per cent GDP boost from the UK’s exit from the EU as an increasingly “fringe” figure.
He also warned of a return to austerity if tax cuts go ahead. “The danger is that further down the line it’s used to cut public services. Using the public finances for short term tax giveaways doesn’t make any sense.”
Nimesh Shah, chief executive of Blick Rothenberg, estimated this week that Ms Truss’ pledges could cost around £40bn – and warned such promises would “undoubtedly fuel” further inflation.
And Citigroup’s chief UK economist, Ben Nabarr, said in a note earlier this week that Truss’s policy platform “poses the greatest risk from an economic perspective in our view – with an unseemly combination of pro-cyclical tax cuts and institutional disruption”.
The widely-respected Institute for Fiscal Studies (IFS) think tank has also warned that tax cuts could push inflation “in the wrong direction”.
In a new assessment of the tax polices set out by both Truss and Sunak, the IFS warned on Thursday that tax cuts funded by more borrowing “would inject additional demand into the economy and further increase inflationary pressures”.
Robert Joyce, deputy director of the IFS, said that Truss was “proposing something quite different from Mr Sunak” – suggesting the offer of at least £30bn worth of tax annual cuts would inevitably mean some cuts in public spending.
“They will mean higher borrowing or less public spending, or some combination,” the IFS expert said on her plans. “Whatever a chosen set of self-imposed fiscal rules might allow in the short term, in the end lower taxes do mean lower spending.”
Sunak has warned against “fairytale” tax cut promises, telling Truss at the recent ITV debate that her plan push up debt was “socialist”. He added: “Borrowing your way out of inflation isn’t a plan, it’s a fairytale.”
Despite the pressure to appeal to Tory members in the six-week contest ahead, he is reportedly keen to wait until at least autumn 2023 before cutting personal taxes to avoid fuelling inflation.
Both the International Monetary Fund and the Organisation for Economic Co-operation and Development have warned that the UK runs a bigger risk of persistently high inflation than other similar economies.
