Kwarteng warned he faces a £60billion bill to stabilize Britain’s finances

According to a leading think tank, Kwasi Kwarteng must announce more than £60bn of fiscal tightening if he is to convince investors he can stabilize the UK’s public finances.

The chancellor, who has vowed to “drop debt in the medium term”, will present a new debt reduction plan and accompanying official forecasts on October 31 in a bid to calm markets after the turmoil caused by his 45 billion cut of the “mini”. -Budgets.

However, analysis by the Institute for Fiscal Studies released on Tuesday showed how difficult it will be for Kwarteng to convince markets he can put public finances on a sustainable path — even if he pushes back the date when he launches one Debt as a proportion of the country’s target income begins to decline.

In the short term, the biggest single pressure is temporary support for energy bills, which will see government borrowing surge to nearly £200bn this year, the third-highest since 1945, the think tank said.

But the IFS estimates that even in 2026-27, after that support ends, government borrowing will reach $103 billion.

Even reversing all of those cuts would not be enough to stabilize debt as a fraction of national income, the think tank said, estimating that would require a larger £62bn of fiscal tightening in 2026-27.

The only way that Kwaiteng could theoretically achieve this is through spending cuts, the IFS said. Indexing working-age benefits to income instead of inflation for two years – a proposal that has sparked rebellion among some Conservative MPs – would save £13bn.

A cut in capital spending to 2% of gross domestic product could save £14 billion, although it would jeopardize the government’s 2.5% growth target.

The remaining £35billion would equate to a 15 per cent cut in all day-to-day spending on public services, according to the IFS – or, if budgets for the NHS and defense were excluded, a 27 per cent cut in everything else, including education.

“That could work on paper and spare him [Kwarteng] backtracking on more of its mini-budget tax cuts,” said IFS director Paul Johnson. But he added that any attempt to promise cuts of that magnitude without specifying where they would fall would stretch gullibility “to the breaking point”.

“The details of the UK government’s fiscal strategy are coming under the scrutiny of financial markets more closely than at any time in recent memory. . . The Chancellor should not rely on overly optimistic growth forecasts or promises of unspecified spending cuts,” Johnson said.

The IFS acknowledged that its projections were uncertain and that its forecast of medium-term borrowing of EUR 100 billion

Their figures are based on economic forecasts by the bank Citigroup, in which GDP growth will average just 0.8 percent per year over the next five years, inflation will peak at almost 12 percent and interest rates will hover at 4.5 percent is lower than markets are expecting .

Benjamin Nabarro, UK chief economist at Citigroup, said one reason for the poor outlook is that monetary and fiscal policies are “now working in opposite directions,” a destabilizing trend that risks making the recovery more painful and delaying it.

The IFS said faster growth would improve the outlook for public finances, but even if the Office for Budget Responsibility, the independent financial watchdog, raised its GDP growth forecast by 0.25 percentage point each year, a fiscal Tightening of 40bn still needed by 2026-27.

The finance ministry said the government’s growth plan – based on tax cuts and supply-side reforms – would “drive sustainable long-term growth” and lead to “higher wages, greater opportunities and sustainable funding for public services”. Kwarteng warned he faces a £60billion bill to stabilize Britain’s finances

Adam Bradshaw

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