Liz Truss will “crash the public finances” if she pursues a huge VAT cut, a leading economist is warning, amid fresh confusion over her plans for the cost of living emergency.
The likely next prime minister has floated a plan to slash 5 per cent off the 20 per cent sales tax – but the head of the Institute for Fiscal Studies has called the idea “quite worrying”.
Ms Truss is also mulling reversing a four-year freeze on income tax thresholds and has sent out conflicting briefings on what help she will provide with soaring energy bills.
Paul Johnson, director of the Institute for Fiscal Studies, accused Ms Truss of a “simplistic” view that reducing taxes can deal with plunging living standards – putting the cost of a 5 per cent VAT cut alone at £39bn.
“You clearly can’t do all of this without completely crashing the public finances,” he told The Times.
“This simplistic mantra that you cut taxes and the economy grows more, that you cut taxes when you have a big deficit and high inflation, and you don’t do it with any other part of the plan, is quite worrying.”
Warning of higher borrowing costs from a larger budget deficit, Mr Johnson added: “The markets for a decade have been willing to fund very high deficits.
“The risk comes if we start on a very different route to other countries and we look riskier than they are.”
Torsten Bell, the head of the Resolution Foundation economic think tank, also said the VAT cut would not work because – unlike after the 2008 financial crash – the problem was not a lack of demand.
Warning it would not help low and middle-earners or cut energy bills, Mr Bell said: “The economics of it don’t work now. It’s expensive and you’ll end up having to do loads more.”
Ms Truss is continuing to resist intense pressure to lift the lid on her plans for the energy crisis – just 8 days before she will take power, according to all the polls.
On Sunday, the Truss camp briefed that she has “ruled out” help for every household, regardless of wealth, the policy favoured by her rival Rishi Sunak.
But the foreign secretary has now rowed back on that stance, suggesting nothing has been ruled out although she does not favour across-the-board “handouts”.
Meanwhile, some of her allies are pushing her “to be more radical” by slashing VAT by a whopping 10 percent, according to a report in The Sun.
Alistair Darling, Labour’s chancellor during the 2008 meltdown, joined calls for bold action to avoid a “lethal cocktail” of recession and high inflation.
“You need something significant and substantial and you need it now, because people’s bills are going to start coming in in a few weeks’ time,” he told the BBC.
“If you don’t do that then you have the risks that I’ve been describing, that the economy will slip into recession with all that entails.”
