Liz Truss – one of the two remaining candidates in the battle to be the next Conservative leader and prime minister – says her tax and spending promises can be paid for without breaking “current fiscal rules”.
Her policies include scrapping the increase in national insurance that her Tory rival Rishi Sunak introduced as chancellor in April, as well as dropping a planned rise in corporation tax currently scheduled for next year.
Talking on the BBC’s Today programme, Ms Truss said the plans “are affordable within our current fiscal rules”.
Those rules say that the UK should only borrow money to pay for long-term investment – not on day-to-day spending – and that government debt should be falling as a percentage of GDP by 2024-25.
So, can she manage it?
How much could Truss spend within current rules?
In March this year, the independent Office for Budget Responsibility (OBR) said that the then-chancellor Rishi Sunak had £30bn of “fiscal headroom” to play with. That’s cash he could use on public spending or tax cuts without breaking the current rules.
But he decided not to use this headroom, citing the OBR’s warning that it could be “wiped out by relatively small changes to the economic outlook,” such as lower-than-expected growth or high-than-expected inflation.
It’s that £30bn that Ms Truss seems to have earmarked for her own policies.
How much do Truss’ plans cost?
Interviewer Nick Robinson put it to the foreign secretary that her proposals would cost the Exchequer £38bn a year. She said the figure was “slightly high but it’s around that”.
The independent Institute for Fiscal Studies (IFS) think tank said on Thursday that Ms Truss’ tax cuts alone would “cost more than £30bn – possibly considerably more,” depending on the precise details.
Add to that a key spending commitment: to increase defence spending to 3 per cent of GDP by 2030. The IFS estimates this could cost £23bn a year by 2030.
Taken together, it looks like Ms Truss has committed to rather more than £30bn a year. So even if the headroom is there, she’ll either exceed it and have to borrow money (thereby breaking a current fiscal rule) or have to make spending cuts elsewhere.
Where’s the money gone?
And there’s another catch: there’s no guarantee that all of that £30bn spare cash is still there.
As IFS boss Paul Johnson points out, the headroom estimate was made at a time when inflation was expected to be a mere 4 per cent. We now know it’s much higher than that.
While inflation increases the amount of tax revenue the government receives (money coming in), it also increases the amount it has to spend on public services (money going out). So there may well be less in the pot than previously thought.
The IFS reiterates the OBR’s warning from April: estimates of fiscal headroom, it says, suffer from a “huge amount of uncertainty”.
FactCheck verdict
Liz Truss says her tax and spending policies will not break “current fiscal rules”.
She has pledged tax cuts that will cost “more than £30bn” according to initial estimates from the independent Institute for Fiscal Studies (IFS).
She seems to be focusing on the £30bn figure as this is the amount of “fiscal headroom” the UK had in April. That is, spare cash that could be spent on tax cuts or spending increases without breaking the current rules.
But she’s also made spending commitments that could cost £23bn a year by 2030, according to the IFS. If those estimates are right then, taken together, her plans would be well in excess of the £30bn figure.
And there’s a further catch: the £30bn of spare cash may not even be there any more because inflation has risen faster than was expected at the time the headroom estimate was made.
The IFS says that “without spending reductions, [Ms Truss’] tax promises would likely lead to the current fiscal rules being broken”.
Ms Truss’ team was contacted for comment.
