Although Truss, the favorite to become Britain’s next prime minister on Monday, has said he will stick to the government’s fiscal rules on debt, the permanent tax cuts he has promised combined with dire developments in the public finances will make impossibility. Voting in the Tory leadership contest closed at 5pm on Friday after seven weeks of hard-fought debate, in which Rishi Sunak, the former chancellor, claimed the Truss economic plan was “a fairy tale” and that extra borrowing would raise further inflation. In March, the Office for Budget Responsibility estimated the government would stick to its fiscal rules with a “margin” of around £30bn. But higher debt and welfare costs have eroded that margin. This, along with Truss’ pledges to reverse rises in national insurance, scrap planned corporation tax rises and increase defense spending, will transform the public finances, according to the FT calculation, which is based on an OBR methodology . Julian Jessop, a fellow at the right-wing think-tank the Institute of Economic Affairs, is advising the Truss campaign. He said if the financial watchdog provided similar oversight it would “make no difference” to the Trust’s plans. “I don’t believe we will or should be setting policy based on the OBR’s three-year forecasts for the public finances,” he added. The Trust has said it will spend billions of pounds to support vulnerable households and small businesses through the cost of living crisis, although such payments will be temporary. FT calculations show the outlook for public finances had already worsened on July 7, when Boris Johnson announced he would step down as prime minister. The outlook worsened further during the leadership campaign as financial markets sold off UK assets in August and priced in significantly higher future borrowing costs. The expectation of higher interest rates has significantly increased the expected cost of the UK’s welfare payments and public debt, which stands at almost £2.5tn. The OBR said it does not expect tax revenues to be boosted by higher inflation to counter these effects. In a July report, it simulated temporary and permanent increases in energy prices similar to those affecting all European countries and found that there would be no boost to tax revenues. However, the economic blow would add to government borrowing and debt. Inflation forecasts have been steadily revised higher since March as energy prices have soared and higher costs have spread from gas and electricity prices to food and almost all prices of goods and services. In March, the OBR believed CPI inflation would average 8 per cent in 2022-23 before falling to 2.4 per cent in 2023-24. The Bank of England’s early August forecasts and the latest Goldman Sachs forecasts show that inflation rates over the two years will be closer to 12 percent this year and 7 percent next year. Higher inflation directly increases government borrowing because over £500bn of public debt is directly linked to the retail price index and benefits, including the state pension, are linked to the CPI. The Truss campaign had previously indicated it intended not to ask the OBR to provide a forecast to accompany any emergency budget in the early days of a Truss premiership, even though the independent fiscal watchdog said it was ready to publish it. In July, it published an analysis of the economic impact of energy shocks and predicted a long-term hit to public finances. Cutting taxes to compensate for an energy shock “simply pushes the cost of higher energy onto future households, as the government cannot reduce the cost of more expensive energy,” it said. The OBR’s assessment of the impact of energy shocks is likely to worsen the outlook for public finances in its next forecast. Welfare bills will rise because they are linked to inflation and the cost of public debt rises as they are linked to both inflation and interest rates. Lending will also be affected by measures proposed by a new government. The rise in inflation would wipe out £22bn of the nearly £30bn margin in fiscal rules that existed in March, according to the FT’s calculation. The UK’s current fiscal rules stipulate that public debt must decline as a share of the economy in three years. Markets expect the UK’s short-term interest rate this time next year to reach 4.4%, up from 1.9% in March this year. Traders are betting that the Bank of England will need to be strong to reduce inflation and that will come at a heavy cost to short-term public sector debt held by the central bank as part of its quantitative easing program. The level of this debt today stands at nearly £850 billion of the total public debt of nearly £2.5 trillion. The government’s long-term borrowing costs will rise as it will have to sell new debt at higher interest rates than previously expected. The average duration of UK government debt is 14 years, so the effect is slow. However, the rate on 14-year debt has risen from 1.54 percent in March to 3.12 percent at the end of August. Jessop said if the outlook was so poor, it reinforced the need for “flexibility” in fiscal rules and the need to cut taxes now to stimulate the economy. Many economists agree that in the short term, the outlook for household finances is so difficult that additional measures will be needed to boost the income of both households and businesses. Paul Dales, chief UK economist at Capital Economics, said “a big support package” was needed “to support [the economy]Damage in the short term from higher gas and electricity prices could reach 100 billion pounds, he said, adding that this may require the government to suspend fiscal rules to take emergency measures.

However, Dales warned that the tax cuts should not be made permanent when public finances were under more severe long-term pressure than previously expected. “The key point is that the new prime minister has to recognize that the situation has changed, that there is less room for tax cuts than before and that at some point spending may have to be cut or taxes raised,” he said. . Additional reporting by George Parker