The tax cuts promised by both Liz Truss and Rishi Sunak in their battle for No 10 are unrealistic without big spending cuts as inflation soars, economists are warning.
Both contenders for the Tory leadership are under fire for failing to be upfront with voters about the economic crisis ahead, in a damning report by the Institute for Fiscal Studies.
It warns that higher than expected inflation will force the Treasury to spend an extra £23bn on benefits and debt interest next year – even before any extra help to curb energy bills and prop up public services.
And that suggests rules on borrowing and debt will be broken unless “matching spending cuts can be delivered” to offset the tax cuts promised by the leadership rivals.
“The reality is that the UK has got poorer over the last year. That makes tax and spending decisions all the more difficult,” said Carl Emmerson, the IFS’s deputy director.
“It is hard to square the promises that both Ms Truss and Mr Sunak are making to cut taxes over the medium term with the absence of any specific measures to cut public spending and a presumed desire to manage the nation’s finances responsibly.”
The leadership race has seen Mr Sunak, the former chancellor, attack the foreign secretary’s “fantasy” economics in promising a £30bn-plus package of personal and business tax cuts.
But, despite his stance as the “sound money” candidate, he is also pledging tax cuts in the near future, having vowed to cut 1p off the 20p basic income tax rate before the likely 2024 general election – and slash it to 16p by 2030.
In its report, the IFS echoes a recent warning by the Treasury watchdog, the Office for Budget Responsibility, that “the public finances are already on an unsustainable long-term path”.
It concludes: “Large, unfunded, permanent tax cuts would only act to make this problem worse.”
The stark conclusions come after Ms Truss, the strong favourite to be the next prime minister, doubled down on her tax-cutting plans at party hustings – even as inflation hit a 40-year high of 10.1 per cent.
“I think we have got to the stage in our economy where taxes are too high and they are potentially choking off growth,” she told Tory members in Northern Ireland.
Mr Sunak did raise the spectre of inflation, arguing that putting unfunded tax cuts “on the nation’s credit card” would “make inflation worse and last far longer”.
He also warned Tories that voters will never “forgive” the party if Ms Truss wins power and fails to rescue the poor from rocketing energy bills, without setting out detailed plans of his own.
Although inflation is expected to fall back in August, it is expected to soar to 13.3 per cent in October when the energy price cap is raised again – pushing the UK into recession, the Bank of England fears.
Labour is demanding a six-month freeze on energy bills, with shadow chancellor Rachel Reeves saying: “We must get a grip on rising inflation leaving families worried sick about making ends meet.”
The IFS said extra short-term borrowing “is not necessarily problematic”, but argued it was more likely to be “appropriate to fund targeted support”.
“There will be additional pressures, likely running into tens of billions, to continue to support households and to compensate public services for high inflation,” it pointed out.
