Fueling concerns that the UK’s precarious financial position will push the pound higher, the chancellor, Kwasi Kwarteng, is expected to reverse a rise in national insurance payments and cut corporation tax at a cost to the Exchequer of £30bn. Kwarteng, who will announce an overhaul of his budget rules to allow the government to borrow more, is also expected to give away billions of pounds by cutting stamp duty on house purchases and confirm a multibillion-pound increase in the defense budget to support war in Ukraine and stimulate development. These measures will be on top of a freeze on energy prices for consumers and businesses that could cost more than £150bn over two years. The IFS report said: “Recent sharp increases in debt interest costs highlight the risks of substantially and permanently increasing borrowing and putting debt on an ever-increasing path.” “There is no miracle cure and putting plans underpinned by the idea that across-the-board tax cuts will provide a lasting boost to growth is a gamble at best,” he added. Sterling fell to $1.138 – from $1.22 last month and $1.40 last year – as traders turned to the greenback ahead of Friday’s mini-budget. The IFS analysis showed that promises to cut taxes and increase spending would push government borrowing to £100bn even if the energy crisis subsides next year – £60bn more than previous estimates. Additional pensions and benefits costs, linked to inflation, and an estimated £18bn hole in public sector budgets, which is likely to grow once higher energy bills are factored in, will add to the government’s financial commitments, he reported. Carl Emmerson, deputy director of the IFS, said he was concerned that the government was choosing to increase borrowing just as it was becoming more expensive to do so. He said government borrowing would miss the Treasury’s existing fiscal targets legislated in January, leading to ever-increasing debt that would “ultimately prove unsustainable”. Kwarteng is expected to argue that the extra borrowing will generate economic growth of 2.5 percent over the next decade, compared with an earlier forecast of 1.5 percent, by raising tax revenue above the cost of tax handouts. As part of his plan to kick-start growth, the chancellor is expected to propose the creation of a network of 12 low-tax, low-regulation investment zones. The announcement, which is expected to take deregulation beyond the post-Brexit free ports introduced by Boris Johnson’s government, will be part of a package that will also include loosening planning laws in the zones. Emerson said the new growth targets set by Kwarteng were not impossible to achieve but “would require either a lot of luck over a long period of time or a concerted change in policy direction. One cannot simply presume oneself on fiscal sustainability.’ The Treasury Department’s independent forecaster, the Office for Budget Responsibility, has previously said there is no evidence the tax cuts can “pay for themselves” through higher levels of growth. Sarah Olney, Lib Dem spokesperson for the Treasury, business and industrial strategy, said: “This government has lost all sense of fiscal responsibility. Future generations will be paying off the Conservative debt for years to come with no guarantee of economic growth.” In August, the public sector borrowed £11.8bn, higher than the City’s forecast of £8.8bn and almost double the amount estimated by the OBR earlier in the year. Subscribe to Business Today Get ready for the business day – we’ll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain information about charities, online advertising and content sponsored by external parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and Google’s Privacy Policy and Terms of Service apply. The IFS said a rate hike by the Bank of England on Thursday would push the level of spending on debt interest payments higher. Inflation also increased the cost of servicing public debt after the proportion of bonds sold by the Treasury linked to the retail price index (RPI) increased. The consumer price index was 9.9% in August, while the RPI was over 12%. The OBR was blocked by Kwarteng from assessing the impact of the tax cuts on the economy’s ability to grow and the potential rise in public debt interest. Mel Stride, a former Tory minister who chairs the Treasury select committee, said it was “vital” that the OBR be allowed to put the Treasury figures through its own calculator to calm jittery financial markets. The IFS said it was disappointed that the OBR had been excluded from providing an update to its spring forecast. Criticism of Kwarteng’s plans to change stamp duty without measures to increase housing supply came from the left and right of the political spectrum. Robert Colville, director of the Center for Free Market Policy Studies, said more supply, rather than just tax cuts, would boost home sales and economic growth. Stamp duty receipts reached £10.6 billion in the first eight months of the year, according to the latest figures from HM Revenue and Customs. Torsten Bell, a former Labor councilor who runs the Resolution Foundation thinktank, said: “There is a big case for reform. Stamp duty is a very bad tax – especially at high levels – that hinders mobility. “[But] a general reduction in stamp duty will increase house prices and mainly benefit wealthier households [the] southeast.”
