Rising inflation and interest rates will cut billions of pounds off the amount the next prime minister has available for tax cuts.
Both Liz Truss and Rishi Sunak intend to fund their tax cuts with about £30bn in projected “fiscal headroom” that the Treasury has under its current plans.
Economists said yesterday’s rate rise would push up the cost of servicing existing debt by at least £5.5bn a year. Rising inflation will also hit index-linked debt – potentially costing the government a further £6.2bn for every percentage point increase.
Last night, the National Institute for Economic and Social Research said the 2.1% contraction in the economy, predicted by the Bank of England, would result in falling tax revenue and higher welfare payments worth about £40bn.
