Prime minister Liz Truss today confirmed for the first time that her tax cuts will require reductions in public spending plans – estimated by one leading economic thinktank at up to £40bn.
The PM’s U-turn on corporation tax means she has backtracked on 45 per cent of the £45bn package of unfunded tax cuts announced by ex-chancellor Kwasi Kwarteng on 23 September, but 55 per cent – around £25bn – remains to be funded.
Just two days after telling the House of Commons there would be no cuts to public services, Ms Truss made clear that she will be forced to rein in spending plans to fill a black hole calculated ahead of today’s announcements at around £62bn.
Speaking in Downing Street, the PM said: “We will do whatever is necessary to ensure debt is falling as a share of the economy in the medium term.
“We will control the size of the state to ensure that taxpayers’ money is always well spent.
“Our public sector will become more efficient to deliver world-class services for the British people.
“And spending will grow less rapidly than previously planned.”
The government’s current spending plans, set out by Rishi Sunak in his spending review of October 2021, envisage an average increase of 3.8 per cent above inflation in total departmental budgets each year to 2024/25.
The total cash increase was calculated last year at £150bn, which was then expected to be worth £90bn in real terms. But soaring inflation has wreaked havoc on the Treasury’ calculations.
Ms Truss said that the £18.7bn saved by raising corporation tax to 25p in 2023 will be used as a “down-payment” towards the medium-term fiscal plan which will set out on 31 October how she intends to balance the books.
But the chief executive of the Resolution Foundation, Torsten Bell, said that this left £20bn to £40bn to be delivered in spending cuts or tax rises, if the government is to get debt falling as a proportion of GDP by 2026/27.
“The last two weeks have seen the announcement and unravelling of the worst unforced error in British economic policy making for generations,” said Mr Bell.
“The prime minister today got rid of her chancellor and has junked almost half of her tax cuts.
“However, the need to fund the remaining tax cuts and darker economic outlook – including higher debt interest costs – mean that despite today’s U-turns, Jeremy Hunt has just two weeks to decide how to fill a black hole of several tens of billions of pounds in the public finances.
“And while much of the focus is on the political fall-out, the public will be far more concerned with the lasting impact on their family finances, not least their mortgages. This whole debacle has been a painful, but it appears necessary, reminder that economic policy making is not a game.”
