Liz Truss could “completely crash the public finances” if she pushed ahead with tens of billions of pounds of tax cuts, a senior economist has warned.
Speaking as Ms Truss, the frontrunner for the leadership, ruled out cash grants for all households to help to pay energy bills, Paul Johnson, director of the Institute for Fiscal Studies, accused her of adopting a “simplistic mantra” of cutting taxes to solve the cost of living crisis.
He said the policies being discussed by her team were “quite worrying” and told The Times that a proposal to cut VAT was “inappropriate” and risked exacerbating inflation, not taming it.
Mr Johnson also said the Bank of England would raise interest rates more quickly if Truss pressed ahead with the cuts.
Help for cost of living
Ms Truss is considering cutting income tax and VAT, with the plans labelled “regressive” by Rishi Sunak’s campaign.
The Foreign Secretary could raise the personal allowance, the point at which people begin paying income tax, from its current £12,570 level up to four years ahead of schedule.
She is also considering a potential five per cent cut in VAT cut across the board as part of a suite of options to tackle the cost living crisis and offset rising energy bills.
A significant increase in Universal Credit from October is also being considered for the 8.5 million most vulnerable families as a way of targeting aid and avoiding blanket “handouts” to all households.
'Simplistic'
Mr 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.