Kwasi Kwarteng warned that his economic “growth plan” is unsustainable

Kwasi Kwarteng warned that his economic “growth plan” is unsustainable

Britain's Secretary of State for Business, Energy and Industrial Strategy Kwasi Kwarteng speaks to the media in Westminster, London, Britain, September 21, 2021. REUTERS/Hannah McKay

Chancellor Kwasi Kwarteng will announce his ‘growth plan’ in Parliament on Friday. (Reuters)

A senior economist has warned MPs that public finances are on an “unsustainable path” ahead of the government’s tax cut bonanza on Friday.

Chancellor Kwasi Kwarteng is due to announce a “growth plan” tomorrow where he is expected to announce a series of tax cuts – including stamp duty, corporation tax, income tax, business rates and national insurance levies.

It comes weeks after the government announced an energy aid package that could cost as much as £150 billion, on top of an earlier pledge by Liz Truss to increase defense spending to 3% of GDP.

Truss has repeatedly said she wants to challenge “Treasury orthodoxy”, and claims this “fiscal loosening” will stimulate growth with debt as a priority in the medium term.

Read more: The Bank of England raises UK interest rates by 0.5% to a 14-year high

However, a growing number of economists have warned that the government is putting public finances on an “unsustainable path” due to the combination of high borrowing and tax cuts.

At a Treasury select committee on Thursday in Parliament, Resolution Foundation chief executive Torsten Bell said the approach is not what “adult decision-making looks like in 2022”.

“If we set a path, which is dependent [GDP growth] “Showing that in my book is that we’re perfectly happy with things being unsustainable,” he said.

“And the problem with waiting for things to appear is that they don’t always appear on the right side that you hope for… you should set the course for a fiscal policy that is sustainable, with a margin for error.

“And it doesn’t look like what we’re headed for tomorrow… this is serious, this isn’t a game.”

British Prime Minister Liz Truss arrives for the 77th United Nations General Assembly at the United Nations Headquarters in New York City, New York, U.S., September 21, 2022. REUTERS/David 'Dee' Delgado

Liz Truss has repeatedly said she wants to challenge ‘Treasury orthodoxy’ on the economy. (Reuters)

The Institute for Fiscal Studies (IFS) released a report on Wednesday which warned “reversing NICs and corporation tax increases, as economic growth stalls, will make the debt unsustainable”.

“The combination of higher spending and significant tax cuts means that borrowing is running at a much higher level than forecast in March,” it said.

“Importantly, even when the Energy Price Guarantee is assumed to have expired in October 2024, our forecast has borrowing at around £100bn a year, over £60bn a year higher than the March forecast.

“Nearly half of this increase in borrowing will be due to the new tax cuts.”

Bell also said that “no politician alive” has taken the approach that the current government is willing to take.

“We haven’t been through anything like this,” he said.

Read more: How September’s bank rate increase affects your mortgage

“No living politician has gone through a phase of trying to do discretionary fiscal easing on top of inevitable fiscal easing [due to the cost-of-living crisis] – in the middle of a phase when the Bank of England says there is no available capacity to be obtained, and raises the interest rate.

“So, I think it’s time to get serious about this… and hope for something [comes up] is not what adult decision-making looks like in 2022.”

Bell also said that history shows that tax cuts and increased spending ultimately lead to cuts in public services at a time when public services such as the NHS are already in crisis.

However, confirming the NIC’s tax cuts on Thursday ahead of his mini budget, the chancellor said cutting tax was essential for growth.

“To raise living standards for all, we must be unapologetic about growing our economy,” Kwarteng said. “Tax cuts are essential for this”.

On Thursday, the Bank of England (BoE) raised interest rates to 2.25% amid rising inflation; it also announced that Britain is already in a recession.

See: Stamp duty cuts: Rumored property tax cuts in Friday’s mini-budget could boost mortgage bills

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