According to the Institute of Fiscal Studies’(IFS) outlook for public finance report, even reversing all of the permanent tax cuts in Kwarteng’s mini Budget would not be enough to stabilise debt.
It added that even if growth was higher than forecasted by 0.25 per cent, a fiscal tightening of £41bn would be needed to stabilise debt.
The IFS said that possible ways the government could deliver this through spending cuts would be via indexing working-age benefits to growth in earnings in the next two years, which would cut spending by £13bn.
Around £14bn could come from cutting investment spending plans to two per cent of national income, though this would be challenging alongside the government’s growth focus.
Another £35bn could come from a 15 per cent cut in day-to-day spending on public services outside of the NHS and Ministry of Defence budgets, but the IFS said that this would require cuts in areas that have already had “deep cuts” over the past decade.
“Such spending cuts could be done, but would be far from easy,” it noted.
No wishful thinking in economic forecasts
The IFS continued: “Uncertainty around any public finance forecast means it is possible debt will fall as a share of national income. But being able to realistically expect it to fall requires a central view of economic growth and what tax and spending policies will actually be pursued.
“While we should hope for better growth, the rationale for an independent Office for Budget responsibility (OBR) is to ensure that politically motivated wishful thinking is not incorporated into economic and fiscal forecasts. The OBR should continue its practice of not incorporating hoped-for growth improvements arising from supply-side reforms until evidence of stronger growth starts to emerge.”
The report added that recent events had shown the “importance of credible strategy and plan for fiscal sustainability”, and financial markets might be “unconvinced by plans underpinned by an assumption of a miraculous uptick in growth” and “vague promises of public spending cuts far into the future”.
“We need to avoid the situation Mr Kwarteng wrote about in 2012 where ‘in each new budget the government promised their books would balance tomorrow – but tomorrow never seemed to arrive’.
The OBR should therefore be very wary of a promise to cut spending in four or five years’ time without sufficient detail of where the axe would fall,” the IFS said.
Borrowing could be £94bn higher than OBR March forecast
Borrowing is set to be £194bn this year, which is £94bn higher than what the OBR forecast in March this year after former Chancellor Rishi Sunak’s spring statement.
The IFS said that £68bn of this was due to support for energy bills announced since March.
In the medium term, the IFS continued that borrowing “remains elevated” even with the assumption that energy support packages will expire.
The IFS said that there was uncertainty about the precise figures, but it expected borrowing in 2026 and 2027 to come to £103bn, which is £71bn higher than its forecast in March.
The IFS said that this would depend on the path of the economy, inflation and interest rate rises.
It noted that £43bn of the increase in borrowing could be explained by the “direct impact of permanent tax cuts” announced by Chancellor Kwasi Kwarteng in his mini Budget.
Debt interest spending could be double
The IFS added that spending on debt interest would £103bn in 2023 and 2024, more than double the £51bn OBR forecast in March. Debt interest spending in 2026 and 2027 is pegged at £66bn, which is £18bn higher than the OBR forecast in March.
The report said that much of this increase would be mitigated if inflation fell back.
The report continued that additional spending of £14bn could be needed in 2023 and 2024, and £23bn in 2024 and 2025 to keep department spending plans in line with inflation.
It explained: “Keeping to the existing cash spending plans is essentially imposing a rather hidden form of austerity on departments, and doing so in a rather arbitrary way, as it depends on the extent to which rising prices are adding to the spending pressures of each department – which will not be equivalent across the public sector.”
