Tax rises are “likely” to come soon as the government faces a “disgusting menu” to find ways to plug a £40bn fiscal black hole, a leading think tank has warned.
This is stated in a report by the Resolution Foundation Rishi Sunak and his chancellor Jeremy Hunt are faced with the thankless task of balancing the country’s finances after the failed economic plans of former Chancellor Kwasi Kwarteng.
The government must find at least £40 billion amid a bleak economic outlook following Liz Truss’ disastrous mini-budget, a think tank has said.
A combination of tax increases and spending cuts is likely to deliver that £40bn, it said.
Mr Sunak and Mr Hunt are now figuring out how to deal with a dire economic forecast ahead of the autumn statement on November 17, which was postponed shortly after Mr Sunak reappointed Mr Hunt.
The Office for Budget Responsibility, an independent government forecaster, may predict a recession next year, according to a report.
And by the end of 2024, the GDP forecast may be reduced to 4%.
Unemployment could also rise by around half a million, and a weaker economic outlook could lead to borrowing costs of around £20bn a year by 2026-27, the report said.
“The government has just over two weeks to finalize its plans to restore economic confidence and the sustainability of public finances,” said James Smith, director of research at the Resolution Foundation.
“While the recent focus has been on improving post-Truzanomics conditions, the central picture remains weaker growth, higher borrowing costs and expensive tax cuts that have left a fiscal hole of at least 40 billions of pounds to fill.”
Fiscal rules are difficult to follow
The report warns that the government may find it difficult to meet its fiscal rules to reduce the debt-to-GDP ratio in the medium term and maintain a current budget balance unless “significant further policy action is taken”.
It said the chancellor’s “menu” of options included cutting investment spending, which could save £10 billion but could have a damaging impact on growth.
The government could also opt for an “austerity option” with cuts to already tight departmental budgets. Mr Hunt has already said that all departments must find savings.
“With inflation at its highest level in 40 years, government departments are already seeing their budgets fall in real terms by around £22bn by 2024-25,” the think tank said.
“It’s hard to see how the Treasury can save more than £20 billion by announcing cuts to everyday spending on public services.”
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“Huge impact” from not increasing benefits and pensions
By not raising benefits and pensions in line with price rises next year, the study suggests the government could save £9 billion.
But he warns it will have a “huge” impact on those struggling, with a low-income family with two children set to lose around £750 and a pensioner £342.
Another option would be to restore the health and social care tax to raise £15bn by 2026-27, while around £2bn could be raised by extending the ‘hidden’ freeze on the income tax threshold for another one year until 2026-2027.
Public investment projects are likely to face cuts as history shows they are “easy to announce but reduce growth in the long run”, Mr Smith said.