Truss tax plans accused of breaking spending rules

Liz Truss's plans to cut taxes would cost at least £30bn, "likely" breaking the existing fiscal rules, an influential think tank has said.

Liz Truss has promised to freeze corporation tax and reverse the 1.25% rise in national insurance.

She said the tax cuts "are affordable within our current fiscal rules".

The Institute for Fiscal Studies says the contest is a "genuine choice", with Rishi Sunak's plans driving overall taxes to a 70-year high.

The fiscal rules - which were introduced by Rishi Sunak when he was chancellor - commit the government not to borrow to fund current spending (as opposed to investment), and to have the national debt falling as a percentage of national income, after three years.

Successive chancellors have set rules as a way of demonstrating their commitment to managing the public finances responsibly.

Mr Sunak is largely continuing with the plans he set out in office, with a warning against "fairytale" economics, and a promise of tax cuts in the future once inflation has been tamed.

Liz Truss, the other candidate still in the race, has sought to draw a clear difference between herself and Mr Sunak, promising tax cuts from "day one," including:

• Reversing the Health and Social Care Levy - a 1.25% rise in national insurance

• Cancelling a planned increase in corporation tax, from 19% to 25%

• Suspending the "green energy levy" added to energy bills.

"That's a clear difference in direction at least in the immediate term," says Robert Joyce, deputy director of the Institute for Fiscal Studies think-tank. "What we have yet to hear so much about is the implications of that for what she would do to spending, and her strategy for managing the public finances going forward."

The IFS says it hasn't been able to calculate a total costing for Ms Truss's plans because some are still not fully set out, especially the measure to scrap levies on bills.

The fiscal rules still allow some room for tax cuts. That comes to around £30bn, according to current forecasts from the government's spending watchdog, the Office for Budget Responsibility.

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But those forecasts are subject to "a huge amount of uncertainty," the IFS notes - with higher-than-forecast inflation likely to put upward pressure on public spending, such as pay for public-sector workers.

And given that Liz Truss's plans add up to at least £30bn, the IFS judges that Ms Truss's would "likely" break two of the current fiscal rules.

Ms Truss told the Today Programme on BBC Radio 4 that "The tax cut plans... are affordable within our current fiscal rules, so we would still see debt falling after three years."

She argued that cutting taxes will boost growth, saying that "What I want to do is increase tax revenues by growing the economy, not choke off growth by raising taxes."

'Healthy contest'

While growth could partially offset the impact of some tax cuts, such as the £17bn cost of scrapping the changes to corporation tax, it wouldn't completely cover them, the IFS says.

"Tax cuts can certainly be a way of promoting economic growth, and a debate about that and about wider supply-side reforms that could boost growth would be a very healthy feature of a leadership contest," says Mr Joyce.

"But very few tax cuts pay for themselves, and certainly the ones that Ms Truss is outlining at the moment would be no exception to that."

As chancellor, Rishi Sunak introduced the two most significant taxes that Ms Truss wants to cancel - the National Insurance rise and the forthcoming increase to corporation tax.

His latest budget put the tax burden on a path to reach the highest level since the 1940s, at 36.3% of national income.

In an article for the Telegraph newspaper today, he argued that "the best way to achieve economic growth is cutting taxes and bureaucracy", but it could only be achieved on "a foundation of low inflation and sound public finances."