Kwasi Kwarteng will need to announce a fiscal tightening of more than £60bn if he wants to convince investors that he can stabilise the UK’s public finances, according to a leading think-tank.
The chancellor, who has promised to “get debt falling in the medium term”, will on October 31 set out a new debt-cutting plan and accompanying official forecasts, in an effort to calm markets following the turmoil sparked by his £45bn tax-cutting “mini” Budget.
But analysis by the Institute for Fiscal Studies published on Tuesday showed how difficult it will be for Kwarteng to persuade markets he can put the public finances on a sustainable path — even if he defers the date at which he aims for debt as a share of national income to start falling.
In the short term, the biggest single pressure is the temporary support for energy bills, which will drive an increase in government borrowing to almost £200bn this year, the third-highest peak since 1945, the thinktank said.
But the IFS estimated that even in 2026-27, after this support has ended, government borrowing will amount to £103bn — some £71bn more than official forecasts showed in March — with the increase largely owing to the tax cuts Kwarteng announced last month.
Even reversing all those cuts would not be enough to stabilise debt as a fraction of national income, the think-tank said, estimating that to do so would require a bigger fiscal tightening of £62bn in 2026-27.
Kwarteng could in theory achieve this purely through spending cuts, the IFS said. Indexing working-age benefits to earnings, rather than inflation, for two years — a suggestion that has sparked a rebellion among some Conservative MPs — would save £13bn.
Cutting investment spending to 2 per cent of gross domestic product could save £14bn, although it would compromise the government’s 2.5 per cent growth target.
The remaining £35bn 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 defence were exempt, a 27 per cent cut in all other areas, including education.
“That might work on paper and spare him [Kwarteng] having to row back on any more of his mini-Budget tax cuts,” said IFS director Paul Johnson. But he added that any attempt to promise cuts on this scale without specifying where they would fall would stretch credulity “to breaking point”.
“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,” said Johnson.
The IFS acknowledged its forecasts were uncertain and that its projection for borrowing of £100bn a year in the medium term “could be wrong by tens of billions in either direction” if the economic outlook changed.
Its figures are based on economic forecasts by the bank Citigroup, in which GDP growth averages just 0.8 per cent a year over the next five years, with inflation peaking near 12 per cent and interest rates at 4.5 per cent, which is lower than markets expect.
Benjamin Nabarro, Citigroup’s chief UK economist, said one reason the outlook was so poor was that monetary and fiscal policy were “now working in opposite directions”, a destabilising development that risked making the recovery more painful as well as delaying it.
The IFS said faster growth would improve the outlook for the public finances, but that even if the Office for Budget Responsibility, the independent fiscal watchdog, added 0.25 percentage points to its forecast for GDP growth in each year, a fiscal tightening of £40bn would still be needed by 2026-27.
The Treasury said the government’s growth plan — based on tax cuts and supply-side reforms — would “drive sustainable long-term growth”, leading to “higher wages, greater opportunities and sustainable funding for public services”.