British finance minister Kwasi Kwarteng needs to make 62 billion pounds ($69 billion) of spending cuts or tax rises to stop public debt growing ever-larger as a share of the economy, the Institute for Fiscal Studies (IFS) said in a report on Tuesday.
Interest rates for new long-term government borrowing leapt to a 20-year high last month, after Kwarteng announced 45 billion pounds of unfunded tax cuts, on top of even greater short-term support for households’ and businesses’ energy bills.
Kwarteng has sought to regain market confidence by scrapping a plan to axe Britain’s top rate of income tax – saving 2 billion pounds – and bringing forward plans for new forecasts and a debt reduction plan to Oct. 31.
But the IFS think tank – whose views on budget policy are closely watched in Britain – said Kwarteng would face an uphill struggle to convince sceptical markets that his plans will boost growth to 2.5% a year promised by Prime Minister Liz Truss.
“The Chancellor should not rely on over-optimistic growth forecasts or promises of unspecified spending cuts. To do so would risk his plans lacking the credibility which recent events have shown to be so important,” IFS director Paul Johnson said.
British government borrowing looks on course to hit 194 billion pounds this financial year and to still be 103 billion pounds in 2026/27 – 71 billion more than government forecasters predicted in March, the IFS said.
The IFS budget projections are based on relatively downbeat growth forecasts from U.S. bank Citi, which estimates that the British economy will grow by an average of just 0.8% a year over the next five years.
However, even if the economy grew a quarter of a percent faster each year, the government would still need to tighten fiscal policy by 41 billion pounds for debt to fall as a share of gross domestic product (GDP), the IFS said.
Debt interest would cost 106 billion pounds this year and 103 billion pounds in 2023/24, the IFS predicted, due to the large amount of finance raised in years gone by through issuing bonds that pay interest that rises as inflation goes up.
Citi economist Ben Nabarro, who presented the forecasts alongside the IFS, said Britain’s large current account deficit made it vulnerable to a loss of confidence.
“The funding basis for that is increasingly precarious,” he said. “Institutional credibility is an absolute must for the UK and any doubts about that risk being hugely destructive.”
Sterling fell to a record low below $1.04 against the U.S. dollar on Sept. 26, and many British government bonds recorded their biggest monthly falls on record.
Debt rising as a share of GDP was acceptable during economic crises – such as those caused by COVID-19 or the recent surge in energy prices – but was not sustainable long term, the IFS said.
“There are constraints that can bite. And it looks as if we are running up against them, perhaps for the first time in a long time,” the IFS said.
If Kwarteng was unwilling to raise taxes, the IFS said one way to achieve 62 billion pounds of cuts would be to raise working-age benefits in line with wages, not prices, for the next two years; to limit public investment to 2% of GDP rather than 3%; and to cut spending on public services outside health and defence by 15%.
“Such spending cuts could be done, but would be far from easy,” the IFS said.