Liz Truss’s disastrous mini-budget cost the country a staggering £30bn – doubling the sum that the Treasury says will have to be raised by Jeremy Hunt this week in a huge programme of tax rises and spending cuts.
The independent Resolution Foundation calculates that the Truss government was responsible for about £30bn of the fiscal hole which the Treasury puts at £60bn, and which Hunt will have to tackle in the autumn statement on Thursday.
The thinktank also says the £30bn figure would have been far higher without the U-turns already taken by Hunt on the Truss plans.
The RF’s economists estimate that in her seven-week premiership £20bn was blown by Truss and her chancellor Kwasi Kwarteng on unfunded cuts to national insurance and stamp duty, with a further £10bn added by higher interest rates and government borrowing costs as the markets reacted with dismay to the former prime minister’s dash for growth.
The rest of the fiscal hole, the RF says, can be accounted for by unexpectedly bad economic conditions, which have meant lower growth and lower tax receipts to the Treasury.
The estimates of the cost of “Trussonomics” will intensify a bitter blame game now being played out at the top of the Tory party.
While many Conservative MPs will be angered by more tax rises, the chancellor is expected to make clear that he is, in large part, having to repair damage caused by the last occupant of No 10, who was backed by many rightwing Tory MPs.
Last week Kwarteng tried to excuse himself for some of the blame, saying he had told Truss to “slow down” and warned her that she would only survive for two months in Downing Street if she pressed ahead with her full tax-cutting agenda.
In an interview with the Sunday Times, Hunt says Truss was right to want to grow the economy, but wrong to do so without making sure tax cuts were funded. “We’ve corrected those mistakes very quickly and, you know, I think we understand how it is very, very important that … alongside any plan you demonstrate that we’re a country that will pay its way,” he said.
On Thursday Hunt will announce £25bn of tax rises, alongside £35bn of departmental spending cuts as he aims to restore at least some of his party’s battered reputation for economic management. The vast majority of the rises will be so-called “stealth taxes”, achieved by freezing thresholds on income tax, national insurance, inheritance tax, pensions savings and the threshold at which companies have to register for VAT. By not raising these thresholds by the rate of inflation, more people are brought into the tax net or dragged into paying at higher rates.
As chancellor, Rishi Sunak froze many tax thresholds until 2026, but Hunt will now do so for a further two years until 2028. The Institute for Fiscal Studies says the Treasury is on course to raise £30bn a year by 2026 because of the freezes and effects of rising inflation, and will reap a further £6bn a year by doing so until 2028.
Hunt is also likely to impose a higher tax rate on the profits of energy companies, raising the extra levy from 25% to 30%, lasting for another six years, on top of the 40% that companies already pay, meaning an effective rate of 70%. In addition the Treasury is examining potential changes to taxes on share dividends, and looking at lowering the threshold for capital gains tax, another move that would prove deeply unpopular in the Tory party.
Sources said consideration was also being given to cutting the threshold at which the 45p rate of tax kicks in from £150,000 to £125,000, and to allowing local authorities to raise council tax by more than the current limits without the need for a local referendum in order to pay for costs including social care.
Hunt is expected to raise pensions and benefits in line with inflation to protect the most needy from the cost of living crisis. But all government departments will be told they have to live within their 2021 budgets this year, meaning huge extra pressures on schools and hospitals, which are having to fund pay rises for staff from existing budgets.
Last night Hunt was also under political pressure from Tory MPs in “red wall” seats. The chair of the Northern Research Group of 40 Conservative backbenchers, John Stevenson, wrote to Hunt calling for guarantees that money would be provided to ensure infrastructure projects such as road and rail schemes could go ahead even if costs had risen due to inflation.
A cut in the Whitehall spending adjusted for inflation will be another blow to the economy. Ministers agreed in 2021 to an average 3.3% inflation-linked rise over the next three years.
However, the lion’s share of the extra funds was slated to be directed towards the health service, funded in part by a 1.25% rise in national insurance. With the national insurance rise scrapped, the health service is likely to receive a less generous funding deal, and unprotected departments such as transport and the Home Office will suffer real-terms cuts.
Government departments and local councils have complained that the practical effects of inflation leave them out of pocket. Hospitals and schools are expected to fall further into debt next year without a larger boost to their funding. Councils says they are trying to tackle a £3.2bn budget shortfall next year that they expect will need to be closed by higher council tax bills.
Kit Malthouse, the education secretary under Truss, said on Saturday that more cuts to schools would be a disaster. Speaking to GB News, he said he had seen “alarming stuff in the papers over the last couple of days where they are indicating that there might be cuts to the education budget. As far as I can see, I can’t see how that can be acceptable.”