Budget u-turn

Public services ‘at risk’ without more tax reversals

Paul Johnson
Paul Johnson: no option (pic: Terry Murden)

Chancellor Kwasi Kwarteng will have no option but to cut public spending unless he scraps some of his other tax announcements, according to a tax expert at a leading think tank.

Paul Johnson, director of the Institute for Fiscal Studies, said the direct impact of the u-turn on the additional 45p rate of income tax is of “limited fiscal significance”.

At a medium-run cost of around £2 billion a year, it represented only a small fraction of the Chancellor’s mini-Budget announcements, he said,.

“His £45 billion package of tax cuts has now become a £43 billion package – a rounding error in the context of the public finances.”

The Chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability, insists Mr Johnson.

“unless he also U-turns on some of his other, much larger tax announcements, he will have no option but to consider cuts to public spending: to social security, investment projects, or public services.

“On the latter, the Chancellor has indicated that departments’ cash spending plans that run to 2024-25 will be left unchanged, which amounts to a real-terms cut in their generosity in the face of higher inflation.

“This will squeeze public services, but will not be enough to plug the fiscal hole the Chancellor has created for himself.”

Liz Truss, the Prime Minister, yesterday declined to respond to questions about whether the tax cuts would be funded by reductions in public spending .

At mid-day the FTSE 100 was down 0.6% at 6,854.73, while the pound was off earlier highs but still 0.3% firmer against the dollar at 1.1198. 

As tax and economics experts crunched the numbers, it emerged that the decision to scrap the top rate tax came amid speculation that as many as 70 Tory MPs were preparing to oppose the Finance Bill, despite threats that they would be kicked out of the party. 


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