Foresight into the next budget warns that Kwasi Kwarteng will have to consider drastic reductions in government spending or the exercise of large tax increases if loans are to be kept under any kind of control. The government's mini-budget has left it facing such a huge black hole in public finances that the most credible way to fill it is severe spending cuts similar to the kind imposed during austerity years a decade ago, according to an authoritative new report.
The "Green Budget", from the Institute for Fiscal Studies (IFS), along with investment bank Citi, warns that the chancellor must cut spending or raise taxes by £62 billion if he is to stabilize or reduce the national debt, as he has repeatedly promised in recent years. last week. The shortfall is a direct consequence of measures announced since the Truss administration took office, including the reversal of various tax increases such as the corporate tax and National Insurance, and his Energy Price Guarantee. It's possible the hole was filled by economic growth, but the IFS said such an outcome would depend more on luck than judgment.
It said the Office of Budgetary Responsibility (OBR), the government's internal forecaster, was unlikely to assume by the end of the month that the steps in Kwasi Kwarteng's mini-budget would improve the country's long-term growth prospects.
The IFS said that even raising working-age benefits in line with income rather than inflation - one of the big and controversial money-saving measures under consideration - would save only a fraction of the money needed - around £13 billion a year. He added that Mr Kwarteng should instead make more dramatic cuts, potentially reducing government investment and cuts to public spending on departments already squeezed to the bone during years of austerity. The IFS Green Budget finds that the amount the government sets to pay interest on debt will increase over the next few years to its highest level, as a percentage of national income, since at least the late 1940s. This increase in interest rates is one element of the current "premium" the government has to pay due to concerns among investors that the government has given up some of its credibility. This “credibility premium” means borrowing costs are currently higher in the UK than expected, given the increase in borrowing that the mini-budget accounts for.
In addition, Citi said that the increase in interest rates that consumers face on their mortgages will also reduce economic growth in the coming years. IFS says the "credibility premium" for public finances is around £10 billion; Citi said the premium for economic growth was 0.1 or 0.2 percentage points. IFS Director Paul Johnson said that with so much geopolitical instability, there is great uncertainty about the outlook for the year ahead, but that Kwarteng is left facing major fiscal challenges.
"The UK government's specific fiscal strategy is under more scrutiny by financial markets than at any point in the past. The Chancellor should not rely on overly optimistic growth forecasts or promises of unspecified spending cuts. To do so would risk his plans lacking credibility. the recent past has proven to be very important. "All that said, we will sympathize with the chancellor if he decides that the current uncertainty is too great to promise specific future action around public spending.
But the same will apply to its recent tax-cut package. He shouldn't apply that argument asymmetrically." Benjamin Nabarro, chief UK economist at Citigroup, added: "With monetary and fiscal policy now working in opposite directions, we think the broader risks surrounding UK monetary-financial stability are growing.
"In the coming years, 'supply shocks' as seen in recent months are likely to become more and more frequent. That may require major changes in the way macroeconomic policies are conducted if we are to avoid another decade of stagnation. more," he concluded.