Canary Wharf business district in London
View of Canary Wharf business district behind branches at dusk in London, Britain March 9, 2021.

Britain's next prime minister will not have room to make large, permanent tax cuts, the Institute for Fiscal Studies said on Thursday, challenging the plans of the two Conservative candidates vying to succeed Boris Johnson as prime minister.

Foreign Secretary Liz Truss wants to reverse more than 30 billion pounds ($36 billion) of recent and upcoming tax rises from her rival, former finance minister Rishi Sunak, who says he wants to cut taxes once inflation is under control.

However, the IFS - sometimes seen as an unofficial arbiter of government spending plans - said the highest inflation in 40 years would require extra public spending in the short term.

Debt servicing costs alone are set to be 54 billion pounds higher next year than the government's budget watchdog forecast in March.

More spending on public services was also "almost inevitable" to deal with the higher cost of living, the IFS added.

Higher inflation also lifts tax revenue, but does so less rapidly than the demands over public spending, the IFS said.

"The reality is that the UK has got poorer over the last year," IFS Deputy Director Carl Emmerson said.

"It is hard to square the promises that both Ms Truss and Mr Sunak are making to cut taxes over the medium-term with the absence of any specific measures to cut public spending and a presumed desire to manage the nation's finances responsibly," he added.

The IFS predicted borrowing in the current financial year would be 16 billion pounds higher than previously forecast, and 23 billion pounds higher in 2023-24, before returning to levels in line with earlier forecasts in 2024-25.

This would give whoever is prime minister at that time 30 billion pounds of surplus on day-to-day spending, but it would be unwise for any politician to make firm commitments to use this to cut taxes, given the uncertainties ahead, the IFS said.

The IFS based its budget projections on growth and inflation forecasts published on Aug. 4, which see inflation peaking above 13% in October before returning to its 2% target in the second half of 2024.

($1 = 0.8334 pounds)

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