Chancellor’s tax cuts mean ‘painful’ spending cuts of £60bn, IFS warns

Kwasi Kwarteng must reverse his tax cut plans or impose a “savage” £60bn austerity on public services, experts and Tory rebels have warned.

Britain is in recession until 2024, forcing the chancellor to abandon his mini-budget gifts or make a “painful” public sector cut of 15% to bring debt under control, according to the Institute for Fiscal Studies.

But any move to cut public services will face fierce opposition from some Tory MPs as parliament reconvenes, putting pressure on Liz Truss after a chaotic party conference and turmoil in UK bond markets.

A former minister who supports Sunak said The independent: “There is no way Tory MPs will be subjected to savage austerity in a post-Covid cost of living crisis. Liz has driven herself into a dead end.”

Another former minister, who supported Sunak in the leadership contest, said The independent that the chancellor “will find it real difficult to get spending cuts through parliament”.

“I won’t be voting for them, and neither will many of my colleagues,” they added.

The former minister said Mr Kwarteng had failed to prepare the ground for last month’s tax cuts or the austerity that was likely to follow, which he warned would turn frightened voters away from the Tories. An obsession with ideological purity preceded political planning.

“Until the mini-budget of September 23, no one had calculated the need for spending cuts,” the former minister said. “They never talked about spending cuts during the summer leadership campaign. It’s like they won leadership with a fake newsletter.”

“Kwarteng has damaged his political credibility by intervening so clumsily,” the former minister added. “It would be better for him to reverse the tax cuts now rather than cut public services, but it may not be enough to redeem his reputation.”

The IFS report concludes that the looming “prolonged” recession means the chancellor cannot continue her planned tax cuts without being forced into “major and painful spending cuts”.

“The chancellor should not rely on overly optimistic growth forecasts or promises of unspecified spending cuts,” said Paul Johnson, director of the IFS. “To do so would risk his plans not having the credibility that recent events have shown to be so important.”

Even if the government risked a fight within its own party and saved £13bn over the next two years by increasing benefits in line with wage growth rather than inflation, it would not be enough to cover the gap in public finances, the IFS were found.

Mr Kwarteng would still have to cut 15 per cent from all areas of public spending, not just health and defence, he said.

Shadow chancellor Rachel Reeves MP said: “Labour forced this Tory government down throughout the cost of living crisis and we will do everything in our power to do it again to get them to topple this the disastrous kamikaze budget. “

The IFS analysis follows the Treasury’s announcement that it will hand over details of Mr Kwarteng’s economic plans and independent forecasts from the Office for Budget Responsibility (OBR) for almost a month, until October 31.

It means details will be published before the Bank of England’s next rate decision, due on November 3.

It also comes as the Bank stepped up its intervention to calm the market for UK government debt as borrowing costs continued to climb higher.

Members of the Bank’s rate-setting committee have lobbied Mr Kwarteng in recent days with public statements underlining their reliance on clear OBR forecasts to set monetary policy.

If the government chooses to show fiscal discipline by cutting spending rather than reversing tax cuts, it risks fresh conflict with unions amid mounting strikes.

TUC general secretary Frances O’Grady said: “The Prime Minister promised in her leadership campaign that there would be no return to austerity.

“But since she took office, she has made the wrong choices. Instead of protecting our services, it’s throwing billions in tax cuts for high earners and corporations.”

He added: “A responsible government would make rebuilding our services damaged by austerity and the pandemic a top priority. Strong services like schools and hospitals not only improve lives, but also help create the kind of economic growth that everyone can share in.”

Her words were echoed by Unite general secretary Sharon Graham, who said: “The government has plunged this country into financial chaos and once again workers are being asked to pay the price.

“We know you can’t grow the economy by destroying jobs, suppressing wages and cutting services that millions of workers and their families rely on. But the government would rather pay for the corporation tax cuts by tearing down our schools and hospitals.”

A Treasury spokesman said: “Through tax cuts and ambitious supply-side reforms, the Growth Plan will deliver sustainable long-term growth, which will lead to higher wages, greater opportunities and sustainable funding for public services.”

They added that details in the budget plans due on October 31 would demonstrate that the government is “committed to fiscal responsibility and getting debt down as a share of GDP over the medium term”.

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