A Cabinet minister and Liz Truss ally has admitted that his Government’s tax cuts are not “risk-free” as he argued that the Conservatives have not had a “clear run” in power over the last decade.
All eyes are on the mini-budget set to be announced by Chancellor Kwasi Kwarteng on Friday, which is expected to put into practice many of the tax-cutting promises made by Ms Truss during the Tory leadership campaign.
Mr Kwarteng is due to set out details of the Government’s plans, including how it will pay for the energy price guarantee for households and businesses, in the so-called “fiscal event”.
As well as reversing the hike in national insurance contributions and scrapping a planned increase in corporation tax, which Ms Truss has promised, it has been reported he will cut stamp duty in a further attempt to drive growth.
But Levelling Up Secretary Simon Clarke, a former top Treasury minister, told ITV’s Peston programme that the Government’s economic policy is not “risk-free” as he said that the Government wanted to go back to the growth rates seen before the financial crash in 2008, when Labour was in power.
“There are no risk-free options when you’re faced with a global crisis of the kind that we’re seeing. Having come straight out of the global pandemic and into the teeth of Russia invading western Europe, these are extraordinary times. But the real risk I think here lies in us being too passive in the face of those challenges, of accepting that we are in this economic low-growth trap,” he told the programme in a pre-recorded interview.
“We want to try and achieve escape velocity, we want to recapture the growth rates that we were seeing prior to the 2008 financial crisis.”
In another key week for British politics, Ms Truss is in New York for the UN General Assembly where she is meeting many world leaders, including US president Joe Biden, for the first time as Prime Minister.
On Wednesday, her Government announced another major policy initiative – this time a new scheme ministers said would roughly halve the price paid for wholesale gas and electricity by non-domestic customers, which include schools and charities.
Mr Clarke said that no Conservative Government “has had a clear run at events over the entire course of the last decade, it has been one crisis after another”.
The comments are likely to raise some eyebrows, with his party in Government since 2010.
During the race to replace Boris Johnson, the opposition Labour Party delighted in the contest as the candidates clashed, and sometimes explicitly criticised, the record of their own party in government.
“What Liz is saying is that we need to accept that we may not get back to normal, that if you like, that the world is in an extraordinary state of affairs at the moment and that being so, that we just need to press on and govern, frankly, as we want to be remembered – as a government that makes things better for people,” Mr Clarke said.
“And clearly as Secretary of State for Levelling Up, my focus is on life chances, and on spreading opportunity. I’m delighted that we’re moving to an unashamedly pro-growth policy.”
Earlier, a leading economic think tank said that Ms Truss’s plans risk putting the public finances on an “unsustainable path”.
The Institute for Fiscal Studies (IFS) has calculated that the combination of higher spending and tax cuts means Government borrowing is set to hit £100 billion a year – more than double the official forecasts last March.
With debt potentially set on an “ever-rising path”, the IFS said the Government’s claim that reducing tax rates would lead to sustained economic growth was “a gamble at best”.
Under the new Prime Minister’s plans, the fiscal targets legislated in January would be missed and while we would get to enjoy lower taxes now, ever-increasing debt would eventually prove unsustainable
Carl Emmerson, IFS
IFS deputy director Carl Emmerson said: “Under the new Prime Minister’s plans, the fiscal targets legislated in January would be missed and while we would get to enjoy lower taxes now, ever-increasing debt would eventually prove unsustainable.”
Despite the scale of the changes, and the worsening outlook for the economy, the IFS said it was “disappointing” that the Office for Budget Responsibility would not be producing a new set of economic forecasts alongside the Chancellor’s statement.
It said the final bill for the energy price cap was “highly uncertain” and while they were working on an assumption that it could be £100 billion over the next two years, it could turn out to be much higher or much cheaper.
The reduction in revenue from the changes to national insurance and corporation tax however was much clearer, costing the Exchequer around £30 billion a year.
At the same time rising inflation was pushing up spending on debt interest as well as state pensions and most working age benefits, while Ms Truss has also pledged to increase defence spending to 3% of national income by the end of the decade.
As a result, the IFS said that even after the energy price guarantee is assumed to have expired in October 2024, borrowing would be running at around £100 billion a year – more than £60 billion higher than was forecast in March.
At around 3.5% of national income, that would leave borrowing not far off double the 1.9% it averaged in the 60 years to the global crash in 2008.
Almost half this increase would be due to the tax cuts – while if they do not go ahead the current budget would be forecast to remain in balance.
Setting plans underpinned by the idea that headline tax cuts will deliver a sustained boost to growth is a gamble, at best
Institute for Fiscal Studies
The prospect of persistent deficits in the current budget and debt rising as a share of national income means both the main fiscal targets set in January will have been missed, the IFS said.
“Allowing debt to rise temporarily to finance one-off packages of support, such as the energy price guarantee or the furlough scheme, in exceptional circumstances is justifiable and can be sustainable, but the same case cannot be made for allowing debt to rise indefinitely in order to enjoy lower taxes now,” it said.
While Ms Truss and Mr Kwarteng argue that higher growth will lead to higher revenues, the IFS said the economy would have to grow by an additional 0.7% a year to 2026-27 just to stabilise debt as a proportion of national income.
To put it in context, the IFS said it was equivalent to the difference in growth rates in the 25 years from 1983 to 2008, when the economy was expanding at an average of 2.8% a year, and the 2010s when growth was averaging 2.0%.
“Finding a way to somehow boost the UK’s rate of economic growth would undoubtedly help. But we shouldn’t underestimate the scale of the challenge,” it said.
“There is no miracle cure, and setting plans underpinned by the idea that headline tax cuts will deliver a sustained boost to growth is a gamble, at best.”
Among the Government’s bid to boost growth is reportedly a plan to rip up some green planning laws to build thousands of new homes on formerly protected land.
The Telegraph reported the Government is set to relax environmental protection within new so-called investment zones, as part of an effort to encourage more house building in certain parts of the country.