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Highlights
- The IFS said Chancellor Kwasi Kwarteng would require a fiscal tightening of £62 billion in 2026-27 to stabilise debt levels.
- IFS has said that the government needs to take more such U-turns on the announcements
Since its announcement in September, Chancellor Kwasi Kwarteng's mini-budget has been facing a lot of heat from economists and other organisations. The latest to join the league is the think tank Institute for Fiscal Studies (IFS), which has said that the Chancellor faces "big and painful spending cuts" worth more than £60 billion if he goes ahead with the tax cuts.
The Liz Truss government has announced a tax-cutting bonanza worth £45 billion, which also included slashing the top rate of income tax from 45% to 40%. However, after facing criticism, it recently took a U-turn on it and reversed the decision.
IFS has said that the government needs to take more such U-turns on the announcements, warning that if Kwarteng proceeds with the tax-cutting measures, he would need to come up with a fiscal tightening of over £60 billion to stabilise the debt. The think tank said that finding this amount of money means that the government will have to see where it can cut spending on a colossal scale, which could pose severe challenges.
Image source: © Skypixel | Megapixl.com
Day-to-day public spending will be on the top of the list, IFS said, suggesting that slashing it by 14% in 2026-27 can be a way to tighten the £62 billion without raising taxes. This will rise to 27% if the NHS and defence budget are exempt from any cuts. On the other hand, if the government decides to index working-age benefits to growth in earnings for 24 months and returns investment spending to 2% of the national income, it will still need to slash 15% from public spending (excluding NHS and defence), the think tank said.
IFS director Paul Johnson says that the specifics of the government's fiscal plans have been under scrutiny from financial markets. Notably, there has been severe turbulence in the markets after the announcement of the mini-budget. The pound sterling has been falling against the US dollar, prompting the Bank of England to intervene to induce stability in the country's bond markets as UK bond yields have soared recently.
Johnson also said that the Chancellor shouldn't rely on over-optimistic growth forecasts, as doing so will risk his plans lacking credibility.
IFS has also estimated that the government borrowing will likely approach £200 billion this year, which will be the third-highest peak since the Second World War. The other two times it reached this much were the COVID-19 pandemic and the financial crisis of 2008 and 2009. IFS's forecast is £100 billion more than the Office for Budget Responsibility's (OBR) of £99 billion in March.
