UK finance minister Kwasi Kwarteng needs to make £62 billion of spending cuts or tax rises to stop the UK’s public debt growing ever-larger as a share of the economy, according to a report from the Institute for Fiscal Studies (IFS).
The debt of the UK government was £2.427 trillion at the end of August 2022, an increase of £195.2 billion compared with August 2021, according to recent figures from the UK’s Office for National Statistics (ONS).
The IFS said UK government borrowing this year is likely to hit almost £200 billion — nearly £100 billion higher than the £99 billion forecast by the Office for Budget Responsibility (OBR) in March.
The IFS said on Tuesday: “The core conclusion of this year’s IFS Green Budget, funded by the Nuffield Foundation and in association with Citi, is that, on a central forecast, he (Kwarteng) would need to announce a fiscal tightening of more than £60 billion just to stabilise debt as a fraction of national income in 2026–27.
“Cuts on this scale would require some big choices. By way of illustration, given current economic forecasts, even indexing working-age benefits to growth in earnings for two years (£13 billion cut) and returning investment spending to 2% of national income (£14 billion cut) would leave him needing to cut 15% from non-NHS, non-defence day-to-day public service spending to deliver the required tightening through spending cuts alone.”
The institute said that under Citi’s central forecast, it would require a fiscal tightening of £62 billion in 2026–27 to stabilise UK debt as a fraction of national income – “so even reversing Mr Kwarteng’s entire £43 billion of ‘mini-Budget’ tax cuts would not be enough.”
The IFS said rising inflation and interest rates will push up spending on working-age benefits, state pensions and debt interest in both the short and medium term.
“We forecast that spending on debt interest next year (2023–24) will be £103 billion, which is £10 billion more than we forecast just before the mini-Budget,” said the IFS.
“It is double the £51 billion forecast by the OBR in March, which was already an increase on the £39 billion forecast by the OBR last October.
“Even in 2026–27 we forecast that debt interest spending will be £66 billion, some £18 billion higher than forecast by the OBR in March, as a result of higher interest rates and a higher level of accumulated debt.”
IFS director Paul Johnson said: “Uncertainties about the path of the economy over the next few years make public finance forecasts very difficult indeed.
“We project borrowing of £100 billion a year in the medium term – but that could be wrong by tens of billions in either direction.
“A credible fiscal plan will recognise that uncertainty, but cannot ignore the fact that, on a reasonable central forecast, debt is forecast to continue rising in the medium term. The Chancellor has acknowledged that we should be striving to reduce it.
“It is just about possible to see how Mr Kwarteng could get debt on a stable, or ever-so-slightly falling, path in the final year of his forecast.
“He could, for example, announce some combination of cuts to working-age benefits and capital investment, plus some unspecified cuts to public services pencilled in for the years after 2025.
“That might work on paper and spare him having to row back on any more of his mini-Budget tax cuts. But the specifics of the UK government’s fiscal strategy are under more scrutiny by financial markets than at any point in the recent past.
“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.”
Benjamin Nabarro, Chief UK Economist at Citigroup, said: “The medium-term outlook for investment remains strikingly weak. Aggressive monetary tightening suggests any meaningful recovery is likely to be pushed into 2025.
“For policy, the outlook is complicated by ongoing supply disruption. In the near term, further demand stimulus merely risks aggravating the near-term challenges.
“And with monetary and fiscal policy now working in opposite directions, we think the broader risks around UK monetary-financial stability are growing.
“In the years ahead, ‘supply shocks’ such as those seen in recent months seem likely to grow more frequent. That may require profound changes in the manner macroeconomic policy is conducted if we are to avoid another decade of stagnation. The UK can ill afford further policy mistakes.”