Chancellor Kwasi Kwarteng will have to find spending cuts of more than £60 billion if he is to stabilise or reduce the national debt, a new report warns.
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 it would require major cuts to public services to get the UK’s finances back under control.
Analysts warned that failure to come up with a credible plan that convinces the markets the government is committed to reducing its mountain of debt 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.
It comes ahead of Mr Kwarteng setting out his medium-term fiscal plan which will detail how the government will reduce debt as a proportion of national income in the wake of his £43 million mini-budget tax giveaway on 31 October.
‘Fiscal tightening’ of £62 billion to stabilise debts
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.
On that basis, the IFS said it would require a “fiscal tightening” of £62 billion in 2026–27 to stabilise debt levels, meaning even reversing all of Mr Kwarteng’s mini-budget tax cuts would not be enough. Even if growth were to pick up by 0.25% a year, the Chancellor would still have to find cuts of £40 billion.
IFS director Paul Johnson said in an online briefing that after 12 years of austerity, cuts on that scale were “extraordinarily hard to achieve”.
He said: “The Chancellor should not rely on over-optimistic growth forecasts or promises of unspecified spending cuts. To do so would risk his plans lacking the credibility which recent events have shown to be so important.
"All that said, we would have sympathy with the Chancellor if he decided that the uncertainties of the present moment are too great to be promising specific future action around public spending. But the same would apply to his recent package of tax cuts. He should not apply that argument asymmetrically."
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.
“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.”
Meanwhile, Citigroup’s chief UK economist Ben Nabarro said the reaction of the markets to the Chancellor’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 added that 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.”