Chancellor Kwasi Kwarteng will have to find spending cuts of more than £60 billion if he is to meet his target to get the public finances back under control, a leading economic think tank has warned.
The Institute for Fiscal Studies (IFS) said it was not possible to deliver cuts on that scale through efficiency savings and “trimming the fat” and that it would require major cuts to public services.
At the same time analysts said failure to come up with a credible plan that convinces the markets the Government is committed to reducing its debt mountain could result in a worse crisis than 1976, when the Labour government was forced to seek a bailout from the International Monetary Fund (IMF).
They warned that rising interest rates as the Bank of England seeks to curb spiralling inflation were likely to result in a “bruising” increase in unemployment.
You do not do that through efficiency savings and trimming the fat. You have to say what it is the state currently does that the state is no longer going to do— Ben Zaranko, IFS
Mr Kwarteng is due to set out his medium-term fiscal plan explaining how the Government will get debt falling as a proportion of national income in the wake of his £43 billion mini-budget tax giveaway on October 31.
In its “green budget” report ahead of Mr Kwarteng’s statement, the IFS said Government borrowing now looked set to hit almost £200 billion this year – around double the £99 billion that was forecast at the time of the last budget in March.
Meanwhile an analysis by the investment bank Citi forecast that the economy is set to grow by an average of just 0.8% a year for the next five years – far short of the 2.5% “trend” rate of growth the Chancellor has said he wants to achieve.
The IFS said that on that basis, it would require a “fiscal tightening” of £62 billion in 2026–27 to stabilise debt levels – so even reversing all Mr Kwarteng’s mini-budget tax cuts would not be enough.
Even if growth were to pick up by 0.25% a year – described by the IFS as a “big increase” – the Chancellor would still have to find cuts of £40 billion.
In an online briefing for journalists to accompany the report’s publication, IFS director Paul Johnson said that after 12 years of austerity, cuts on that scale were “extraordinarily hard to achieve”.
Even if the Government was to link the uprating of benefits to earnings rather than inflation for the next two years, saving £13 billion, and return investment spending to 2% of national income, saving another £14 billion, that would still require major reductions elsewhere.
With the NHS likely to need additional funding and Prime Minister Liz Truss committed to increasing defence spending, Ben Zaranko of the IFS said other services may have to be axed altogether.
At best we think this means bruising increases in unemployment ... We see that as a prohibitively painful economic process in the medium term— Ben Nabarro, Citigroup
“If you want to be increasing defence by that amount, if you want to have the NHS not keel over, you are looking at cuts of more like a fifth, more like a quarter, to everything else,” he said.
“You do not do that through efficiency savings and trimming the fat. You have to say what it is the state currently does that the state is no longer going to do.”
Citigroup’s chief UK economist Ben Nabarro said the reaction of the markets to Mr Kwarteng’s mini-budget – which saw the pound slump to a record low against the US dollar – should be seen as a warning which ministers would be unwise to ignore.
He said the UK’s basis for meeting its external financing needs was “increasingly precarious” and that failure to take action could lead to an even worse situation than either the 1976 IMF crisis or Black Wednesday in 1992, when sterling was forced out of the European Exchange Rate Mechanism (ERM).
“If we do push too far and don’t heed the warning, we could find ourselves in a much worse circumstance than either of those crises necessarily suggest,” Mr Nabarro said.
He said Mr Kwarteng’s decision to cut taxes meant the Bank of England could be forced to raise interest rates even higher than would otherwise be the case in order to keep a lid on inflation.
“In current circumstances the contradictory position of monetary and fiscal policy is an error,” Mr Nabarro said.
“At best we think this means bruising increases in unemployment … We see that as a prohibitively painful economic process in the medium term.”
