The Chancellor’s U-turn on his plans to axe the 45p tax rate will do little to ease the pressure on the UK’s public finances and the mammoth spending cuts needed to get borrowing back on track, think tank experts have warned.
Paul Johnson, director of the Institute for Fiscal Studies (IFS), said the about-turn on Kwasi Kwarteng’s decision to scrap the 45% rate on earnings over £150,000 is the “smallest part” of the mini-budget, representing around £2 billion of the £45 billion in tax cuts.
He warned the move will not prevent the Government from putting the UK’s already creaking public finances on an “unsustainable footing”.
He tweeted: “From a fiscal point of view, important to remember cut to 45p rate was just about smallest part of the mini budget. What was a £45 billion tax cutting package is now a £43 billion package.
“This U turn has, in itself, essentially no effect on fiscal sustainability.”
In an interview with BBC News, he added that while the pound has rebounded after the rethink, underlying worries over the unfunded tax cuts remain and Mr Kwarteng will still have to address these fears in his November fiscal statement or face further market turmoil.
Mr Johnson said: “This will make a small difference to overall levels of inequality, but actually the big story that this is now a £43 billion tax giveaway remains, and the story remains that we haven’t had any forecasts from the Office for Budget Responsibility (OBR).
“We are pretty confident that on current tax and spending plans, the Government is on course to have an unsustainable fiscal policy… so from that point of view, it’s pretty much as we were.”
He added that by the fiscal statement on November 23, Mr Kwarteng “needs to have come up with something fairly convincing about how he’s going to get the public finances on to a sustainable footing, whether that involves undoing some more of those tax cuts or some additional tax rises or something fairly dramatic on the spending side”.
Torsten Bell, chief executive of the Resolution Foundation think tank, said that while the U-turn will help with internal and wider political pressure on the Government, it “doesn’t change the big picture of a £40 billion package of unfunded tax cuts which drove the market reaction” or avoid the “big spending cuts that will follow”.
Mr Bell had called Mr Kwarteng’s mini-budget “the biggest unforced economic policy error of my lifetime”.
Last week, the Resolution Foundation said the Government may be forced to return to the type of spending cuts not seen since the days when George Osborne was Conservative chancellor.
It predicts that without the OBR forecasting faster growth in the years ahead, the Government is likely to need to tighten fiscal spending by £37 billion to £47 billion for debt to be falling by 2026-27.