Conservative leadership: Liz Truss tax cuts will hurt public services and bust Treasury rules, economists warn

Liz Truss’ £30billion tax cut plans have been slammed by economists, who warn they will fuel inflation and risk a return to austerity while breaking Treasury rules.

The Tory leadership favorite has been embroiled in a damaging row over the credibility of her strategy after arguing she would tame soaring inflation – subverting economic orthodoxy.

An economics professor said The Independent the claim was “ridiculous”, while the respected Institute for Fiscal Studies went further, also pointing out the danger to public services and spending rules.

The row came as Rishi Sunak rejected the proposal for his 1p income tax cut – announced for spring 2024 – to steer Conservative members away from Ms Truss and underscore her ‘fiscal responsibility’ credentials.

The IFS concluded that Ms Truss’ proposals would ‘likely lead to the breaching of current fiscal rules’, requiring borrowing for day-to-day spending and leaving the debt still mounting in the next election.

The think tank warned of a ‘deterioration in the quality’ of public services if, as she suggested, Ms Truss puts tax cuts ahead of protecting services from rising inflation in its fall emergency budget.

The damning verdict came as the Foreign Secretary looked set to claim victory in the contest, securing a gaping 24-point lead over rival Mr Sunak in a poll of Tory members.

During the election campaign in Peterborough, Ms Truss doubled down on her plans, dismissing the IFS’ warning that she would break tax rules and insisting her tax cuts were ‘affordable’.

She signaled that she was ready to make cuts if necessary, saying: ‘When I was Treasury minister I was in charge of public spending. I effectively controlled public spending.

Earlier, in her first major campaign interview, the Foreign Secretary raised her eyebrows as she told BBC Radio 4: ‘My tax cuts will reduce inflation’.

The package includes canceling the National Insurance hike to fund the NHS (annual cost of £13billion), scrapping the planned rise in corporation tax from 19% to 25% (17 billion), scrapping the green tax on energy bills (unknown cost) and more support for carers to take time off work (unknown cost).

Ms Truss dismissed the “consensus of the Treasury, the economists”, accusing them of “peddling a particular kind of economic policy for 20 years” which “didn’t bring growth”.

“What people in Britain desperately need now is change. We must free up investment in our country,” insisted the candidate, arguing that her tax cuts would stimulate “the supply side of the economy.”

“The reason we have inflation is because it’s a supply shock, combined with a little loose monetary policy over time,” Ms Truss said, adding of her strategy. : “It’s not a bet”.

But Dr Jo Michell, associate professor of economics at UWE Bristol, said The Independent“The tax cuts she is proposing are more likely to be inflationary so on a balance of probabilities her comments are wrong.

“It’s definitely a bet. Say the plan has no risk [of increasing inflation] is ridiculous.

Frances Coppola, a financial economist and writer, warned of a high likelihood that the plans would “backfire” and damage the economy, saying: “These tax cuts are likely to be inflationary in the short term.”

She compared the situation to Edward Heath’s “race to growth” blamed for runaway inflation in the 1970s, adding: “Liz Truss is using exactly the same argument – that inflation will resolve itself if we grow the economy”.

Mr Sunak added his own criticism, agreeing that such tax cuts would be ‘inflationary’, telling LBC Radio: ‘If the government goes on a huge borrowing spree it will only make the situation worse. »

The former chancellor admitted he was the outsider in the battle for No10, despite the backing of 137 Tory MPs, a considerable lead over the Foreign Secretary’s 113.

As well as the tax cuts row, he is vulnerable to the wrath of some Tory members that he helped trigger Boris Johnson’s departure – by stepping down – while Ms Truss backed him.

And his reputation hasn’t fully recovered from the controversy over his wife’s non-dom tax status, or the revelation that he had a US green card while chancellor.

In his interview, Mr Sunak struggled to substantiate his claim to the Thatcherite mantle, pointing to his idea of ​​free ports as an example of radicalism that could match his own.

He said it would be “a priority” to make Rwanda’s controversial deportation policy work, alongside the appointment of a new ethics adviser after the prime minister refused to fill the post.

And he sought to exploit his greater popularity with the general public, saying: “If you look at all the poll evidence, it’s pretty clear that I’m the best person to defeat Sir Keir Starmer.”