Mini-Budget threatens to put UK on ‘unsustainable path’, say IFS and Citi

The chancellor will put Britain’s public finances on an “unsustainable path” on Friday in his mini-budget, which, according to independent analysis, will create a £60bn a year gap in the budget.

The joint report from the Institute for Fiscal Studies think tank and Citi, the investment bank, said on Wednesday that government debt would still rise as a share of national income — even after the government’s energy price support expired — contrary to Kwasi Kwarteng’s claims. .

The report accuses Kwarteng of ramping up lending when it gets expensive. The report follows the release of official figures showing that in August public borrowing rose to twice the level expected by the independent tax watchdog.

The IFS-Citi report said the government’s energy price support package could cost more than £100 billion, but the price tag would depend hugely on international energy prices.

More seriously, it said, permanent tax cuts worth £30bn a year, expected to be announced in Friday’s mini-Budget, alongside increases in the cost of debt, interest and benefits, would push loans to unsustainable levels. .

According to the analysis, credit levels will be £60bn a year ahead of the Office for Budget Responsibility forecast in March.

Isabel Stockton, an economist at the IFS, said: “By borrowing at this level — nearly double the share of national income seen on average between World War II and the global financial crisis, when growth prospects were much stronger — debt would continue to rise as a proportion of national income.”

The analysis casts doubt on Kwarteng’s claim that tax cuts will boost growth and help reduce debt. But even after Wednesday’s disappointing loan figures, the chancellor was not apologetic about the government’s new strategy. He said strong growth and sustainable public finances went hand in hand.

“As chancellor, I have pledged to deleverage over the medium term. But despite a major economic shock, it is absolutely right that the government is now taking action to help families and businesses, just as we did during the pandemic,” he said.

Column chart of monthly difference between result and forecast (£bn) showing public sector lending falling below OBR forecasts

The difficulty for the new Treasury team is that public finances are deteriorating at a time when inflation is high and there is limited scope for a major fiscal stimulus to boost growth without creating inflationary pressures.

Markets are concerned that a loan-and-spend package when unemployment is at its lowest point in 50 years will see the UK live beyond its means and force the Bank of England to put on the brakes.

In August, the public sector borrowed £11.8 billion, higher than city forecasts of £8.8 billion and almost double the amount estimated by the OBR earlier this year, according to official figures released on Wednesday. Earlier, the watchdog predicted the deficit would be just £6 billion in August.

The data did not show that a slowdown in economic growth had boosted lending, with central government tax receipts of £69.6 billion only slightly below the OBR’s forecast of £70.5 billion.

Instead, government spending was higher than expected. Interest payments on debt, coupled with higher inflation, were £8.2bn, well ahead of the expected £4.9bn, and other government spending also outperformed forecasts.

The only bright spot in the figures was that loans were revised downwards by £8.6bn for the first four months of the fiscal year, bringing the starting point close to the original OBR estimates. However, this improvement masked a gradual deterioration in finances during the financial year.

Jens Larsen, director of Eurasia Group, the consultancy, said the government’s strategy is likely to lead to a decline in the popularity of British assets in the financial markets.

“The combination of a potentially expensive and relatively inefficient fiscal package, a central bank looking to prove its independence and a very large net supply of government bonds is likely to lead to continued upward pressure on UK risk premia,” Larsen said.

Leave a Comment