The Institute for Fiscal Studies has criticised the absence of official scrutiny by the Office for Budget Responsibility of the upcoming ‘fiscal event’ and has produced its own assessment of the impact that a weak economic outlook combined with tax cuts could have on the UK.  

  

The new government headed by prime minister Liz Truss is expected to announce the tax cuts which she said during her leadership campaign would be introduced if she is PM. They are expected to be the reversal of a recent rise in national insurance contributions – likely also the health and social care levy that would succeed it – and the axing of a planned rise in corporation tax; this would reduce tax take by about £30bn a year. 

 

These tax perks will come alongside support for households and businesses to deal with high energy bills, the cost of which has not been revealed. In addition, Truss has said she would increase defence spending, while inflation is pushing up the cost of big expenditure items like state pensions. 

 

The planned announcements this Friday are widely considered a ‘Mini-Budget’, even though the government is calling it a ‘fiscal event’. Despite it containing announcements typically made in a Budget, chancellor Kwasi Kwarteng has refused to commission independent forecasts from the OBR, a decision the IFS branded “disappointing”.  

 

 

In a new report, part of its ‘Green Budget’ report produced in association with Citi and sponsored by the Nuffield Foundation, the IFS aims to fill this gap in cost forecasting. Carl Emmerson, deputy director of the IFS and an author of the research, said Truss’s economic and tax plans would mean fiscal targets legislated in January would be missed. 

 

“While we would get to enjoy lower taxes now, ever-increasing debt would eventually prove unsustainable,” he said.  

 

Rising interest rates will add to the problem as they make borrowing more expensive. “The government is choosing to ramp up borrowing just as it becomes more expensive to do so, in a gamble on growth that may not pay off,” said Emmerson.  

 

The increase in annual growth required just to stabilise debt as a fraction of national income – more than 0.7% of national income under IFS forecasts – would be equivalent to the difference in the growth seen between 1983 and the financial crisis in 2008, and that seen over the 2010s, he explained. 

 

“Getting that scale of increase in trend growth, while not impossible, would require either a great deal of luck over a long period or a concerted change in policy direction,” he said. “One cannot simply assume oneself to fiscal sustainability.” 

 

 

The institute has said that fiscal loosening and the weak outlook mean debt will balloon, with borrowing set to run at £100bn a year even after the Energy Price Guarantee expires, which is more than £60bn a year higher than forecast in March.  

 

“Borrowing at this level – almost double the share of national income seen on average between the Second World War and the global financial crisis, when growth prospects were much stronger – would see debt continue to rise as a share of national income,” observed research economist Isabel Stockton, another author of the report.   

 

Mark Franks, director of welfare at the Nuffield Foundation, which sponsored the research, said the Energy Price Guarantee will provide urgently required assistance to households that were facing the prospect of rocketing energy prices over the coming months.  

 

“However, it is currently unclear how the impact of the additional national debt created will affect people across the income distribution in the years to come. There is also a risk that the increased help with costs now will add significantly to the tax burden on future generations. In the interests of transparency, people need to understand these trade-offs,” Franks added.   

 

While Truss’s government aims to cut tax, the cuts follow “large and progressive tax increases” introduced by the previous government, highlighted IFS senior research economist, Xiaowei Xu, speaking at a webinar held by the IFS on Thursday morning. Former chancellor Rishi Sunak planned to lower the basic rate of income tax to 19% in April 2024 and lift the national insurance threshold from £9,880 to £12,570. 

 

However, he also announced a freeze of the income tax thresholds until 2025-26, which at the time was expected to raise £8bn. With inflation running at about 10%, it is now expected to bring in roughly £30bn, according to the IFS. The freeze, if maintained, would increase the number of higher and additional rate taxpayers to 7.7m people or 21% of taxpayers in 2025, as an extra 1.6m people are expected to become higher rate taxpayers by then.

 

 

The IFS research is based on Citi’s latest forecast for growth, inflation and interest rates, which implies a shorter and shallower recession than the Bank of England forecast in August and expects the cash economy to be 2% smaller in 2026-27 than the OBR forecast in March.