IFS think-tank wonks, fans of redistribution and big government are having Burmese kittens about tax cut promises from Tory candidates. Other Tory candidates are brandishing their “realism”, which is code for defeatism.
The OBR’s latest economic and fiscal outlook estimates that for each 1% of higher nominal GDP, public borrowing in 2024/25 will be 0.8% lower. The Centre for Economics and Business Research (CEBR) forecast is that nominal GDP in 2024/25 will be 5.7% points higher than the OBR assumes. If they are right this alone generates £133 billion of net additional revenues. Against that needs to offset some likely higher spending.
The CEBR argues that
If we assume that public spending will be the same share of GDP as in the OBR projections, this increases the cost of public spending by £34 billion; higher inflation will raise indexed debt payments by about £7 billion while higher interest rates could raise debt payments by as much as £30 billion. Even allowing for all these, it is pretty clear that the OBR’s forecasting failures mean that substantial additional net revenues are likely to be generated compared with those expected. Which in turn means that net tax (after allowing for expenditure) receipts in 2024/25 will be about £60 billion more than the OBR’s base estimates.
Since these receipts will come from the effects of inflation and fiscal drag meaning that people will be paying more tax than they would have expected, it would not be unreasonable for the additional revenues to be used for tax cuts.
Economist Douglas McWilliams points out that since these receipts will come from the effects of inflation and fiscal drag meaning that people will be paying more tax than they would have expected, it would not be unreasonable for the additional revenues to be used for tax cuts. The £60 billion will cover the tax cuts being advocated by Liz Truss…