MNI INTERVIEW: Truss Likely To Cut Taxes Before Crisis Budget

Heavy favourite to be the next UK Prime Minister Liz Truss is likely to unveil a tax cut and measures to help with the cost-of-living crisis early in her government, leaving a full emergency budget and borrowing plans to a later date, Ben Zaranko, senior economist at the Institute for Fiscal Studies, told MNI.

The official fiscal forecaster, the Office for Budget Responsibility, normally requires lengthy consultation with the Treasury to assess new fiscal measures, so Truss could unveil tax and household support giveaways while this is still underway, Zaranko said.

"She is saying she is going to have an emergency budget and the date that has been floated by her team ... is the 23rd of September. I think that it is unlikely that we will see a full Budget that day, an actual, proper Budget because the OBR would have to do things really quickly,” Zaranko said (MNI INTERVIEW: BOE Should Look More At Fiscal Risks-OBR Chief).

During her leadership campaign, Truss has also spoken of a new departmental spending review, but trying to do this in short-order also looks unrealistic, Zaranko said.

“They are not going to have time to do a full spending review in a few weeks, unless you take every (departmental) Budget and slice off 5% or something," he said. “I think it would be preferable for her coming in to announce a package of new household support, announce the tax measures, the new tax cuts … put them in legislation.”

INFLATIONARY PRESSURE ON SPENDING

Work by Zaranko and colleagues at the IFS has highlighted another problem facing the new premier – higher inflation is adding to the upward pressure on public spending to an extent understated by fiscal arithmetic, which relies on GDP deflators to assess real public spending,.

The UK’s way of assessing public sector output, by measuring actual outputs such as medical operations and teachers’ classroom hours, drove down output relative to other economies during the pandemic but then fuelled a public sector output rebound as restrictions were lifted (MNI INTERVIEW: End Of Covid Activity Drags UK Down Q2 GDP).

"That rebound plays havoc" with the deflators as "You are basically spending the same amount or a little bit more, but your output has gone up by a huge fraction because you have reopened all your schools and hospitals. The unit cost of each unit of hospital output looks like it has gone through the floor," Zaranko said.

A headline figure from the IFS work was that higher inflation entailed that by 2024 real public services spending would be less than planned but Zaranko said that may be an underestimate, with his work not factoring in the latest, broader based price rises.

“I really wanted to be conservative rather than produce a mega-number that could end up being a wild overestimate. I think GBP18 billion is probably on the lowish side. I think it could be in a broad range of something like GBP10 and 30 billion and something in the GBP20 billion mark is probably a reasonable estimate,” he said.

Results of the Conservative Party leadership election are due by Sept 5. Truss has also floated the idea of including lengthening the maturity of long-term UK debt. putting ‘Covid debt’ on a secure footing, although details have been lacking.