According to the report, the prime minister and chancellor face a difficult challenge to recover from Liz Truss and Kwasi Kwarteng’s terrible mini-budget, which threw the economy into disarray and precipitated the end of Ms. Truss’ brief leadership.
A top think tank has warned that tax increases are “certain” shortly as the government faces an “unpalatable menu” of options to plug a £40bn fiscal black hole.
According to research by the Resolution Foundation, Rishi Sunak and his Chancellor Jeremy Hunt confront a daunting challenge to rebalance the nation’s finances following Kwasi Kwarteng’s failed economic policies.
As part of the aftermath of Liz Truss’s terrible mini-budget, the government would need to find at least £40 billion despite a bleak economic forecast, according to a think tank.
It was suggested that £40 billion may be found through a combination of tax hikes and budget cuts.
Mr. Sunak and Mr. Hunt are currently determining how to address the dismal economic outlook before the rescheduled Autumn Statement on November 17, which was postponed shortly after Mr. Sunak reappointed Mr. Hunt.
According to the article, the government’s independent forecaster, the Office of Budget Responsibility, may anticipate a recession next year.
And by the end of 2024, GDP predictions might be reduced by up to 4 percent.
According to the research, unemployment might increase by around 500,000 and borrowing could increase by approximately £20 billion per year due to the poor economic outlook by 2026-2027.
James Smith, director of research at the Resolution Foundation, stated that the government had just over two weeks to finalize its plans to restore its economic credibility and the viability of the public finances.
Recent attention has been focused on the improvement of conditions post-Trussonomics, but the fundamental situation remains one of weaker growth, higher borrowing costs, and costly tax cuts that have left a £40 billion fiscal hole to fill.
Fiscal rules are difficult to adhere to
Unless “substantial additional policy action” is taken, the government may find it difficult to satisfy its fiscal rules of decreasing the debt-to-GDP ratio over the medium term and producing a balanced budget.
According to the report, the chancellor’s “menu” of possibilities includes investment spending cuts that may save £10 billion but hurt economic growth.
The administration may potentially adopt the “austerity option,” in which already constrained department budgets would be further reduced. Mr. Hunt has already stated that all departments must identify cost cuts.
“With inflation at its greatest level in forty years, government departments will see their budgets decline by almost £22 billion in real terms by 2024-25,” a think tank stated.
It is difficult to imagine how the Treasury could credibly save more than £20 billion by announcing cuts to public service spending.
The failure to increase benefits and pensions would have a “huge impact,” according to the report.
According to the report, the government could save £9bn by not increasing benefits and pensions in line with inflation next year.
A low-income working family with two children would lose almost £750, and a pensioner would lose approximately £342, the report predicts.
Another alternative would be to reinstate the health and social care charge to raise £15bn by 2026-2027, while around £2bn might be raised by prolonging “stealth” income tax threshold freezes for an additional year to 2026-2027.
Mr. Smith stated that it is likely that cuts will be made to public investment projects because they are “simple to publicize but reduce growth in the long run.”
