Spending

Liz Truss’ tax and spending plans cause consternation among economists | Liz Truss

Liz Truss says her economic program of tax cuts and public spending will revitalize the UK economy, but it’s not just her rival candidate for Prime Minister Rishi Sunak who says the measures will be doomed .

Economists lined up to warn that his £30billion package – including reversing this year’s National Insurance hike, suspending green levies on electricity bills and canceling ‘a big increase in corporation tax in 2023 – will increase inflation and leave the government with higher debt bills.

The Foreign Secretary and favorite in the Tory leadership race has slammed the Treasury’s economic record during her opponent’s term as chancellor, saying he was shy and ‘contractual’ when he should have favored the growth.

Liz Truss: “My tax cuts will lower inflation” – video

Citing other European countries that have spent more money to support households hit by the cost of living crisis, Truss said it would allow people to keep more money by taxing less. She also touted a carer’s allowance and pushed defense spending up to 3% of GDP – or an additional £86billion over the next five years – as ways to help the UK avoid a recession.

Meanwhile, the Bank of England has come under attack from Truss and his allies for claiming that looser government spending should have a counterbalance in a tighter policy of controlling the money supply.

Returning to Margaret Thatcher’s position in 1979, Truss believes that inflation is partly the result of cheap borrowing encouraged by the central bank, so tighter monetary policy would limit rising prices. Last weekend, she said the government should “review” the Bank’s mandate “to ensure it is tough enough on inflation.”

For now, the BoE is independent and coming up with its own policies to bring inflation back to a 2% target. Truss is likely to cause consternation in financial markets if she seeks to meddle in central bank decision-making.

Nick Macpherson, the former Permanent Secretary to the Treasury, described the tax cut proposals of Sunak’s rival Tory candidates, including Truss, as “minus the heirs of Margaret Thatcher; more Recep followers [Tayyip] Erdoğan”.

Turkey’s president fired more than five central bank bosses because they failed to pursue his chosen interest rate policy. He left the country with an inflation rate of almost 80% and a currency that was worth 90% less than when Erdoğan started ruling the country almost 20 years ago.

Ben Nabarro, UK economist at Citi, said: “Liz Truss’ policy platform poses the greatest risk from an economic perspective with an unseemly combination of pro-cyclical tax cuts and institutional disruption.”

Robert Joyce of the Institute for Fiscal Studies think tank warned that his £30bn pledge would have implications beyond the tax system which remain unclear.

But one thing is certain: “it will mean higher borrowing or less public spending, or a combination”, so large swaths of Whitehall and social spending will have to go under the hammer. “At the end of the day, lower taxes mean lower spending.”

Truss’ strategy has some support, however. Economist Gerard Lyons became a potential supporter after telling BBC Radio 4’s World at One: “We need tighter monetary policy to tackle inflation and tighter fiscal policy. flexible to promote growth”.

He dismissed claims that targeted tax cuts would be inflationary and self-defeating, saying that a big cut in fuel taxes by reducing the green tax would lower transport costs.

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Truss also cited Patrick Minford as an economist who endorsed his approach. The Cardiff University academic rose to prominence ahead of the Brexit referendum, which he says could generate £135billion in extra revenue for the UK. Last year, independent government forecasters at the Office for Budget Responsibility estimated it would cost around £80billion in lost revenue.

The OBR also warned this month that tax cuts rarely pay off. Worse for Truss and his proposals, he said, Britain’s public finances were on an ‘unsustainable’ long-term trajectory, with a debt burden that could more than triple without further tax hikes to cover the cost growing aging population and lower fuel taxes. .