Liz Truss’s tax-and-spend plans remain “unsustainable” following her U-turn on the 45p tax rate for high-earners, a leading economic expert has said.
The humiliating climbdown, announced this morning by Kwasi Kwarteng, will reduce the unfunded tax cuts in the chancellor’s mini-Budget by just £2bn, from £45bn to £3bn, said Paul Johnson, the director of the Institute for Fiscal Studies.
This difference is “trivial” in economic terms and is unlikely to have much effect on the view of financial markets or the Bank of England on the overall package, Mr Johnson told the BBC News Channel.
And he said it sets the scene for “dramatic” cuts to public spending in Mr Kwarteng’s 23 November fiscal statement, unless the chancellor is prepared to back down on further Budget measures, raise taxes elsewhere or face down the markets over his failure to rein in debt.
“This was the smallest fiscal measure in the mini-Budget,” said Mr Johnson. “To the extent that what we saw a couple of weeks ago was leading to fiscal unsustainability, it still is.
“Nothing really has changed. What has changed, perhaps, is a sense that this is a government that will back down, that will listen and will take opinion seriously.”
Mr Johnson said that the “big story” from the mini-Budget remained that it delivered an unfunded package of tax cuts totalling more than £40bn without the backing of an independent assessment by the Office for Budget Responsibility spending watchdog.
“We’re pretty confident that on current tax and spending plans, the government is on course to have an unsustainable fiscal policy - in other words, debt rising over time,” he said. “So from that point of view, it is pretty much as we were.”
Mr Johnson said that the U-turn could provide the government with “a bit of breathing space” with the markets.
But he said: “The difference it’s made really is trivial. There’s a lot of credibility issues, a lot of sense-of-direction issues here, rather than real change.”
In the fiscal statement which he has promised for 23 November, Mr Kwarteng will have to deliver “something convincing about how he is going to get the public finances onto a sustainable footing - whether that involves undoing some more of those tax cuts or some additional tax rises or something fairly dramatic on the spending side”, said Mr Johnson
