'Not a game': UK finances on unsustainable path, warns top economist

·Political Correspondent, Yahoo News UK
·3-min read
Britain's Secretary of State for Business, Energy and Industrial Strategy Kwasi Kwarteng speaks to media in Westminster, London, Britain, September 21, 2021. REUTERS/Hannah McKay
Chancellor Kwasi Kwarteng will announce his 'Growth Plan' in parliament on Friday. (Reuters)

A senior economist has warned MPs that public finances are on an "unsustainable path" ahead of the government's tax cut bonanza on Friday.

Chancellor Kwasi Kwarteng is set announce a "Growth Plan" tomorrow in which it is expected he will announce a raft of tax cuts - including to stamp duty, corporation tax, income tax, business rates, and National Insurance contributions.

It comes weeks after the government announced an energy support package that could cost as much as £150bn, on top of a previous pledge from Liz Truss to increase defence spending to 3% of GDP.

Truss has repeatedly said she wants to challenge "Treasury orthodoxy", and claims this "fiscal loosening" will stimulate growth with debt a medium-term priority.

Read more: Bank of England hikes UK interest rates by 0.5% to 14-year high

However, a growing number of economists have warned that the government is putting public finances on an "unsustainable path" due to its combination of high borrowing and tax cuts.

At a Treasury select committee on Thursday in parliament, Resolution Foundation chief executive Torsten Bell said the approach is not what "adult decision-making looks like in 2022".

"If we set a path, which relies [GDP growth] turning up that, in my book, is us being perfectly happy with things being unsustainable," he said.

"And the problem with waiting for things to turn up, is they don't always turn up on the right side that you're hoping for... you should set a course for a fiscal policy that is sustainable, with a margin for error.

"And that is not looking like what we're heading for tomorrow... this is serious, this is not a game."

British Prime Minister Liz Truss arrives to the 77th United Nations General Assembly at the United Nations headquarters in New York City, New York, U.S., September 21, 2022. REUTERS/David 'Dee' Delgado
Liz Truss has repeatedly said she wants to challenge 'Treasury orthodoxy' on the economy. (Reuters)

The Institute for Fiscal Studies (IFS) on Wednesday released a report warning "reversing NICs and corporation tax rises, as economic growth stalls, would leave debt on an unsustainable path".

"The combination of higher spending and substantial tax cuts leaves borrowing running at a much higher level than forecast in March," it said.

"Importantly, even once the Energy Price Guarantee is assumed to have expired in October 2024, our forecast has borrowing running at about £100 billion a year, over £60 billion a year higher than forecast in March.

"Almost half of this increase in borrowing would be due to the new tax cuts."

Bell also said that "no living policymaker" has taken the approach that the current government is willing to pursue.

"We have not been through something like this," he said.

Read more: How September’s Bank rate rise affects your mortgage

"No living policymaker has been through a phase of trying to do a discretionary fiscal loosening, on top of an unavoidable fiscal loosening [due to the cost-of-living crisis] - in the middle of a phase when the Bank of England says there is no spare capacity to be had, and is raising interest rates.

"So, I think it's time to take this seriously... hoping something [comes up] is not what adult decision making looks like in 2022."

Bell also said that history shows cutting taxes and increasing spending ultimately leads to cuts to public service investment at a time when public services like the NHS are already in a crisis.

However, confirming the NICs tax cut on Thursday ahead of his mini-budget, the chancellor said cutting tax was vital for growth.

"To raise living standards for all, we need to be unapologetic about growing our economy," said Kwarteng. “Cutting tax is crucial to this".

On Thursday, the Bank of England (BoE) increased interest rates to 2.25% amid rising inflation; it also announced that the UK is already in a recession.

Watch: Stamp duty cut: rumoured property tax cut in Friday’s mini-Budget could push up mortgage bills