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‘No room for tax cuts’ that would risk recession

Paul Johnson IFS
Paul Johnson: we are in a terrible fiscal bind (pic: Terry Murden)

Chancellor Jeremy Hunt has been warned that pre-election tax sweeteners would rekindle inflation and risk tipping the economy into recession.

A think tank says monetary policy must strike a delicate balance at a time when weak public finances also reduce the case for trimming tax.

“An ill-timed fiscal loosening – such as an unfunded package of pre-election tax cuts – might give a short-term economic sugar rush, but could prove unsustainable and ultimately mean a protracted recession as interest rates rise even further to bring inflation back under control,” says the Institute for Fiscal Studies

“The state of the public finances also undermines the case for net tax cuts any time soon. The Chancellor is in a terrible bind, as will be whoever is Chancellor after the general election.”

In its Green Budget paper, it says that “there is no room for a fiscal loosening, whether tax cuts or spending increases. 

“The Chancellor is right – he should not be cutting taxes at the forthcoming Autumn Statement.”

Paul Johnson, director of the IFS, said: “We are in a horrible fiscal bind. With taxes at record levels, and government revenues forecast to exceed non-interest spending for the first time in a generation, you might expect plenty of room for either tax cuts or spending increases.

“But poor growth and very high spending on debt interest over the next few years mean that the national debt is stuck at close to 100% of national income, even with tight spending settlements and further big tax rises in the pipeline.

“The price of our high levels of indebtedness, failure to stimulate growth, and high borrowing costs is likely to be a protracted period of high taxes and tight spending.”

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