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Tuesday, August 30, 2022

Will Truss crash the economy?

Actually, it's difficult to think how the Tories can screw up the economy any more than they have, but at least one economist thinks that Liz Truss' plans to cut taxes will make things worse.

The Times reports that Paul Johnson, director of the Institute for Fiscal Studies, has accused Truss of adopting a “simplistic mantra” of cutting taxes to solve the cost of living crisis. He has warned that she would “completely crash the public finances” if she pushed ahead with tens of billions of pounds of tax cuts:

He told The Times that a proposal to cut VAT was “inappropriate” and risked exacerbating inflation, not taming it. Johnson also said the Bank of England would raise interest rates more quickly if Truss pressed ahead with the cuts.

In addition to reversing the rise in national insurance, scrapping the green energy levy and cancelling the planned increase in corporation tax, Truss is said to be contemplating further tax cuts as part of an emergency budget to be held shortly after she entered No 10, assuming she wins the contest. The result will be announced a week today.

Measures being discussed include cutting the basic rate of income tax, raising income tax thresholds in line with inflation and reducing VAT by between 2.5 and 5 percentage points. Rishi Sunak, Truss’s leadership rival, said a 5 point cut in the rate of VAT would cost £39 billion, and he described the measure as regressive.

“Cutting VAT will benefit higher-income households more, leaving very little to no benefit for lower-income households who will need the most help this winter,” a spokeswoman for his campaign said.

Truss has refused to say how she will provide relief to households having to fund an 80 per cent rise in energy costs, but is expected to announce support to help poorer households and pensioners with their energy bills, possibly by increasing universal credit and winter fuel payments.

She has played down the likelihood of further measures to reduce the nation’s bills, such as the £400 payments announced in May by Sunak when he was chancellor. “Liz is not in favour of universal handouts,” an ally said.

Johnson said the economic picture was different from when Gordon Brown announced an emergency VAT cut of 2.5 percentage points in 2009, and questioned the economic reasoning for such a measure.

“It made sense to have a temporary cut in VAT in the financial crisis because there was a huge drop in demand and a big recession without much in the way of inflation,” he said.

“It might reduce inflation temporarily, but it clearly increases it at the point at which the VAT cut is undone.”

He said there was a greater case to raise income tax thresholds, given that the Treasury had expected to generate £8 billion from the “stealth tax” when it was announced this year. As a result of inflation, the freeze in income tax thresholds is set to raise £20 billion.

Johnson said that no matter the tax cuts, support for energy bills would need to be given to people on low and modest incomes and he questioned the need for an immediate slashing of income tax on top of other measures.

“You clearly can’t do all of this without completely crashing the public finances,” he said. “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.”

He added that a large deficit could push up borrowing costs. “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,” he said.

So, our future Prime Minister is seeking to win an internal leadership contest by promoting semi-literate economic policies that could make leave us in a complete mess. This country is in so much trouble.
Comments:
Earlier this year, sterling touched $1.25. Its value then settled to around $1.22. It has fallen over the last week to $1.17 and appears to be falling still. Part of this is the market anticipating further interest rate rises by the Federal Bank, but clearly it also reflects international confidence in the UK economy.
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