UK’s £50bn black hole: Brits face a long, cold winter full of spending cuts and fresh tax hikes
After barely a week in office, Rishi Sunak, the new Prime Minister, and his equally new Chancellor, Jeremy Hunt, are expected to move ahead with tax rises for millions of Brits.
As early as next week, Sunak and Hunt will most likely extend a freeze on the thresholds at which people start to pay the different rates of income tax and national insurance, which could result in more people being dragged into higher tax bands as wages increase.
Moreover, they share the view that a squeeze on spending is needed to address Britain’s black hole of up to £50bn in the public finances.
Autumn statement next month
Hunt will set out his plans in the Autumn Statement on November 17 and is considering splitting the burden equally between tax rises and spending cuts.
Public sector workers could face deep real-terms cuts to wages, with The Times reporting that the Treasury is looking at an increase of 2% across the board for 2023-24, at a time when inflation is expected to be well above that threshold.
A Treasury source said today that “no decisions have been taken” and the “independent pay review body process takes place next year”.
With BP unveiling profits that doubled to more than £7.1bn in the three months to September, pressure is continuing to mount for an enhanced windfall tax on oil and gas giants to help fill the Treasury coffers.
Cop26 president Alok Sharma, who was demoted from the Cabinet by Sunak, said: “We need to raise more money from a windfall tax on oil and gas companies and actively encourage them to invest in renewables.”
Sunak was holding a meeting of his Cabinet this morning, but it was not clear whether the dire state of the public finances would be on the agenda.
The warning came as the Resolution Foundation think tank said Sunak and Hunt face an “unpalatable menu” when it comes to rebalancing the nation’s finances.
With a deteriorating economic outlook and the legacy of last prime minister Liz Truss’s disastrous mini-budget as a backdrop, it suggests the Government will need to find at least £40bn – likely through a combination of tax rises and spending cuts.
The think tank said the Office for Budget Responsibility could predict a recession next year, with GDP forecasts cut by up to 4 per cent by the end of 2024.
Unemployment could also rise by around half a million, the report suggests, with the weaker economic outlook bringing borrowing up by around £20bn a year by 2026-27.
“The Government has a little over two weeks to finalise its plans to repair its economic credibility and the sustainability of the public finances,” said James Smith, research director at the Resolution Foundation.
“While the recent focus has been on conditions improving post-Trussonomics, the central picture remains one of a weaker growth, higher borrowing costs and expensive tax cuts that have left a fiscal hole of at least £40bn to fill.”James Smith
According to the report, the Government may struggle to meet its fiscal rules of reducing the debt-to-GDP ratio in the medium term and deliver a current-budget balance unless “significant further policy action is taken”.
Among the “menu” of options open to the Chancellor are cuts to investment spending, a move the Resolution Foundation said could save £10bn but also have a detrimental impact on growth.
The think tank also suggests the Government could try to choose the so-called “austerity option”.
Such a move would require cuts to already-squeezed department budgets.
“With inflation at its highest level for 40 years, Government departments are already seeing their budgets fall in real terms by around £22bn by 2024-25. It is hard to see how the Treasury could credibly save more than £20bn by announcing cuts to day-to-day public service spending,” the think tank said.
The Resolution Foundation study suggests the new administration could save £9bn by choosing not to raise benefits and pensions in line with rising prices next year.
It said any such move would have a “huge” impact on those struggling, with a low-income working family with two children losing around £750 and a pensioner £342.
One option open to the Prime Minister and Chancellor would be to “go full circle” on the mini-budget by reinstating the health and social care levy – a move that would raise £15bn by 2026-27.
Public investments under threat
Around £2bn could also be raised by extending the “stealth” freezes in income tax thresholds by a further year to 2026-27.
Smith said the lesson from history is that public investment projects are likely to face cuts.
“History tells us that this will involve cuts to public investment, which are easy to announce but reduce growth in the longer term,” he said.
“Further austerity for public services is also likely, but there are limits to how big these can credibly be, as public services are already facing cuts of £22bn thanks to high inflation.
“This reality means that the Autumn Statement is likely to involve tax rises, not just spending cuts.”