Truss' economic plans remain 'unsustainable' despite humiliating U-turn on 45p tax rate

Liz Truss' tax and spending plans remain" unsustainable" following his U-turn on the 45p tax rate for high earners, a leading economics expert has said.

The humiliating descent, announced this morning by Kwasi Kwarteng, cut unfunded tax cuts in the Chancellor's Mini-Budget by just £2 billion, from £45 billion to £43 billion, said Paul Johnson, director of the Institute for Fiscal Studies.

This difference is "insignificant" in economic terms and unlikely to have much effect on the opinion of the financial markets or the Bank of England re on the global package, Mr Johnson told the BBC News Channel.

In terms of his judgment on inflation and the ripple decisions on raising interest rates "the Bank will be just as stupid knowing that £43bn is pumped into the economy as it would have been with £45bn,” he said.

And he said it set the stage for 'dramatic' public spending cuts in Mr Kwarteng's November 23 budget statement unless the chancellor was ready to back down on new ones budget measures, raising taxes elsewhere or confronting the markets over its inability to get its debt under control.

"This was the smallest budget measure in the mini-budget," Johnson said. . "To the extent that what we saw a few weeks ago was leading to fiscal unsustainability, it still is.

"Nothing has really changed. What has changed, perhaps, is the feeling that this is a government that will back down, listen and take opinion seriously."

Mr Johnson said the "great history' of the mini-budget remains that it offered an unfunded package of tax cuts totaling more than £40billion without the backing of an independent assessment by the Office for Budget's spending watchdog Responsibility.

"We are quite confident that on current tax and spending plans, the government is on track to have an unsustainable fiscal policy - in other words, the debt is growing over time ", did he declare. "So from that perspective, that's pretty much what we were."

Mr. Johnson said the U-turn could give the government "some breathing room" with the markets.

But he said: "The difference it makes is really insignificant. There are a lot of issues credibility, a lot of sense of direction issues here, rather than real change."

If the markets react positively to the change, it may take away "some of the pressure" on the Le The Bank's monetary policy committee will raise interest rates, the IFS chief said.

But he added: "We can still expect interest rates are rising significantly and it will remain the case that for anyone with a large portion of a mortgage at all, these increases in interest rates will offset the tax cuts that have been introduced."

In the tax return he has promised for November 23, Mr. Kwarteng will have to deliver "something convincing about the how he's going to put public finances back on a sustainable footing - whether it's reversing even more of these tax cuts or some additional tax increases or something quite dramatic on the spending side” , said Mr Johnson.

If he was unwilling to do any of these things, Kwarteng should 'scare him' and declare that the OBR was mad and he didn't would not meet its fiscal target of lowering debt as a percentage of GDP within three years, but thought it could do so in five or seven years.

Markets "may not react well" to such a statement, Mr Johnson said.

The head of the Resolution Foundation's low-wage think tank, Torsten Bell, agreed: "The U-turn on 45p doesn't change the view of together a £40bn package of unfunded tax cuts that have prompted market reaction to (and are not avoiding) the big cuts in d spending that will follow.

"The U-turn on 45p helps domestic politics (Tory MPs won't vote against the Money Bill), helps wider politics (Labour wants to attack 45p and not other tax cuts) and make the overall tax cut package less regressive (moves it from a big giveaway for the top of the page to the top half).