Kwasi Kwarteng will have to announce a fiscal tightening of more than £60billion if he is to convince investors he can stabilize UK public finances, according to a leading think tank.
The Chancellor, who has promised to “lower the debt in the medium term”, will present a new debt reduction plan and the official forecasts that accompany it on October 31, in an attempt to calm the markets following the turbulence caused by the his £45billion tax. Budget “mini” cut.
But analysis from the Institute for Fiscal Studies released on Tuesday showed how difficult it will be for Kwarteng to persuade markets that he can put public finances on a sustainable path – even if he postpones the date on which he will. targets debt as a share of the national budget. income to begin to decline.
In the short term, the biggest pressure is temporary support for energy bills, which will see government borrowing rise to almost £200billion this year, the third highest since 1945, the think tank said.
But the IFS has estimated that even in 2026-27, after that support ends, government borrowing will amount to £103bn – some £71bn more than the official forecast in March – the increase being largely due to the tax cuts announced by Kwarteng last month.
Even undoing all these cuts would not be enough to stabilize debt as a fraction of national income, the think tank said, estimating it would require a bigger fiscal tightening of £62billion in 2026-27.
Kwarteng could in theory achieve this only through spending cuts, the IFS said. Indexing working-age benefits to earnings, rather than inflation, for two years – a suggestion that sparked a rebellion among some Tory MPs – would save £13billion.
Reducing capital expenditure to 2% of gross domestic product could save £14bn, although it would jeopardize the government’s 2.5% growth target.
The remaining £35bn would equate to a 15% cut in all daily spending on public services, according to the IFS – or, if the NHS and defense budgets were exempted, a 27% cut across all the other areas. , including education.
“It could work on paper and save him [Kwarteng] having to roll back his mini-budget tax cuts,” said IFS director Paul Johnson. But he added that any attempt to promise cuts of this magnitude without specifying where they would fall would push credulity “to the breaking point”.
“The specifics of the UK government’s fiscal strategy are coming under greater scrutiny in financial markets than at any time in the recent past. . . The Chancellor should not trust overly optimistic growth forecasts or promises of unspecified spending cuts,” Johnson said.
The IFS acknowledged that its forecast was uncertain and that its medium-term borrowing projection of £100bn a year “could be off by tens of billions in either direction” if the economic outlook changed.
His figures are based on the Citigroup bank’s economic forecast, in which GDP growth averages just 0.8% a year over the next five years, with inflation peaking at nearly 12% and interest rate at 4.5%, which is below market expectations. .
Benjamin Nabarro, Citigroup’s chief UK economist, said one of the reasons the outlook was so poor was that monetary and fiscal policies were “now working in opposite directions”, a destabilizing development that risked making the recovery more painful and to delay it.
The IFS said faster growth would improve the outlook for public finances, but that even if the Office for Budget Responsibility, the independent fiscal watchdog, added 0.25 percentage points to its forecast for growth in the GDP each year, a fiscal tightening of £40bn will still be needed by 2026-27.
The Treasury said the government’s growth plan – based on tax cuts and supply-side reforms – would “spur sustainable long-term growth”, leading to “higher wages, greater opportunities and sustainable financing of public services”.