No comfort from voices of reason and experience

Liz Truss would “completely crash the public finances” if she pushed ahead with tens of billions of pounds of tax cuts, a senior economist has warned.

Liz Truss’s plan to cut VAT would crash economy, warns expert

Paul Johnson, director of the Institute for Fiscal Studies, accused Truss 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”.

He told The Times that a proposal to cut VAT was “inappropriate” and risked exacerbating inflation, not taming it. Johnson also said the Bank of England would raise interest rates more quickly if Truss pressed ahead with the cuts….

…Johnson said the economic picture was different from when Gordon Brown announced an emergency VAT cut of 2.5 percentage points in 2009, and questioned the economic reasoning for such a measure.

“It made sense to have a temporary cut in VAT in the financial crisis because there was a huge drop in demand and a big recession without much in the way of inflation,” he said.

“It might reduce inflation temporarily, but it clearly increases it at the point at which the VAT cut is undone.”

He said there was a greater case to raise income tax thresholds, given that the Treasury had expected to generate £8 billion from the “stealth tax” when it was announced this year. As a result of inflation, the freeze in income tax thresholds is set to raise £20 billion.

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.

George Grylls (Extract)

Bold action needed now on energy bills, says Alistair Darling

“You need something significant and substantial and you need it now, because people’s bills are going to start coming in in a few weeks’ time.”

Darling, who served as chancellor under Gordon Brown, told BBC Radio 4’s Today programme.

“If you don’t do that then you have the risks that I’ve been describing, that the economy will slip into recession, with all that entails. And when you’ve got that on top of the fact you’ve got inflation already at very, very high levels we haven’t seen since the 1970s, this is a lethal cocktail, which is why it needs bold action taken by the government now, not fiddling around with small measures that frankly won’t make any difference at all.”

While the government has already offered some support to households, Darling said this was now far from sufficient to meet the scale of the crisis.

He said: “Frankly, the stuff that’s been announced so far might have passed muster earlier this year. It simply won’t do now. You need something far more substantial than that unless you are willing to see substantial damage being done to our economy.”

A lesson from 2008 was that “you’ve got to do more than people expect and you’ve got to do it more quickly than people expect if it’s going to work”, Darling said.

“It’s going to cost money. When I announced the package in 2008 when it was the banking crisis, it amounted in total to about £500bn, but actually we got all of that money back over the following years. So what I think we need to see today from the government, from the new prime minister, is measures that will be big enough to deal with this.”

Peter Walker (Extract)