Hunt and Sunak face £89bn fiscal hole without tax rises or spending cuts

Without spending cuts or tax rises, prime minister Rishi Sunak and chancellor Jeremy Hunt will burn a £89bn hole in the public finances in a few years time, a new report out today reveals.

A combination of former prime minister Liz Truss’s tax cuts in the shambolic 23 September mini-budget still lingering and a flatlining economy are on course to balloon the government’s deficit by 2026/27.

According to the economic think tank the Resolution Foundation (the Foundation), £40bn worth of departmental and investment spending cuts and tax rises are needed at the 17 November autumn statement to ensure Sunak and Hunt hit their financial targets.

The government must ensure debt as a share of the economy is falling and day-to-spending is not funded by borrowing.

Higher interest rates triggered by the Bank of England tightening borrowing costs seven times in a row will add to pressure on the UK’s finances by swelling the country’s debt servicing bill.

Spending cuts or tax hikes needed to plug fiscal hole of £89bn

The Bank is expected to heap more pain on to the government’s balance sheet when it likely lifts rates 75 basis points to three per cent on Thursday.

Central banks around the world have been lifting rates to tame an inflation surge, pushing UK debt rates higher.

Debt costs have fallen sharply after Hunt reversed nearly everything in Truss’s mini-budget. 

Those two factors have strengthened the UK’s financial position around £40bn, but a big hole remains. Around £12bn of Truss’s tax cuts were retained, mostly concentrated in the 1.25 percentage point national insurance hike reversal. 

Governments typically cut investment spending to balance the public finances, but the Foundation calculated just £10bn of the required £40bn fiscal consolidation can come from reducing investment spending due to Hunt and Sunak’s fiscal rules.

If Sunak and Hunt cut public spending more than £20bn after inflation has eroded departments’ budgets, it would amount to the peak of the David Cameron and George Osborne austerity cuts after the financial crisis, the report said.

Scaling back investment spending would likely weigh on growth, further reducing the government’s tax take, hitting the public finances.  

Reinstating the national insurance rise would raise £15bn, while increasing benefits in line with earnings instead of inflation – running at 10.1 per cent currently – would save £9bn, the Foundation said. 

Both measures would squeeze Brits’ living standards.

“There are limits to how big these [cuts] can credibly be, as public services are already facing cuts of £22bn thanks to high inflation,” James Smith, research director at the Foundation, said.

The UK’s spending watchdog, the Office for Budget Responsibility (OBR), is certain to predict a “recession next year as GDP forecasts are slashed by up to four per cent by the end of 2024,” the Foundation said.

Unemployment will climb around half a million to above levels registered during the Covid-19 crisis, the organisation added.

A Treasury spokesperson said: “As the Chancellor has made clear, our challenging fiscal situation means there are difficult decisions to be made and nothing is off the table in the pursuit of economic stability – but protecting public services and the most vulnerable will be prioritised.”