UK’s 10% inflation casts doubt on Truss and Sunak’s tax cut promises

theguardian.com:

Britain’s first double-digit inflation in more than four decades has cast doubts on the plausibility of the tax cuts being promised by Liz Truss and Rishi Sunak during their leadership battle, one of the UK’s leading thinktanks has said.

Following news that the government’s preferred measure of the cost of living rose by 10.1% in the year to July, the Institute for Fiscal Studies said higher inflation would mean extra spending on welfare benefits, state pensions and on debt interest.

The result of inflation being five times higher than a year earlier would be weaker public finances, making it harder for either of the two hopefuls to replace Boris Johnson to make good on their tax pledges, the IFS said.

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Truss, the frontrunner to be the next prime minister, has said she would reverse the increase in national insurance contributions and not go ahead with the planned rise in corporation tax next year – with her package estimated to cost £30bn. Sunak has said he would cut taxes but only when inflation is back under control.

But the IFS said in the next financial year – 2023–24 – borrowing was likely to increase by £23bn, because the government would need to uprate benefits and pensions in line with a higher inflation rate at a cost of £4bn and also pay £54bn in higher debt interest on inflation-linked bonds. The spending increases would only be partly offset by a £34bn increase in tax revenues as a result of rising inflation.

The thinktank said there would be additional pressures, probably running into tens of billions of pounds, to continue to support households struggling with higher energy bills