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Warning of 'scary' spending cuts after tax U-turns Warning of 'scary' spending cuts after tax U-turns
(35 minutes later)
Jeremy Hunt faces "scary" decisions on spending after undoing swathes of his predecessor's tax cuts, analysts warn.Jeremy Hunt faces "scary" decisions on spending after undoing swathes of his predecessor's tax cuts, analysts warn.
The new chancellor reversed £32bn of cuts from the mini-budget to try to balance the government's books but must find billions more in savings.The new chancellor reversed £32bn of cuts from the mini-budget to try to balance the government's books but must find billions more in savings.
The Institute for Fiscal Studies (IFS), an economics think tank, said deep spending cuts were inevitable.The Institute for Fiscal Studies (IFS), an economics think tank, said deep spending cuts were inevitable.
The Resolution Foundation, which focuses on those on low incomes, said the "toughest choices" lie ahead.The Resolution Foundation, which focuses on those on low incomes, said the "toughest choices" lie ahead.
Mr Hunt's strategy, which includes keeping income tax at current levels, comes after economists warned the government faced a £60bn black hole in the public finances following last month's mini-budgetMr Hunt's strategy, which includes keeping income tax at current levels, comes after economists warned the government faced a £60bn black hole in the public finances following last month's mini-budget
The former chancellor, Kwasi Kwarteng, had announced huge subsidies to energy prices and sweeping unfunded tax cuts, prompting turmoil in the financial markets. The former chancellor, Kwasi Kwarteng, had announced huge subsidies to energy prices and big tax cuts, prompting turmoil in the financial markets.
Investors were alarmed that there was no independent assessment of the impact on the economy and no explanation of how the package would be paid for.Investors were alarmed that there was no independent assessment of the impact on the economy and no explanation of how the package would be paid for.
On Monday. Mr Hunt shelved almost all of Mr Kwarteng's tax changes and said he would scale back support for household energy bills. But experts believes there is still a black hole of up to £40bn in the public finances to fill.On Monday. Mr Hunt shelved almost all of Mr Kwarteng's tax changes and said he would scale back support for household energy bills. But experts believes there is still a black hole of up to £40bn in the public finances to fill.
What Jeremy Hunt's statement means for youWhat Jeremy Hunt's statement means for you
Paul Johnson, director of the Institute for Fiscal Studies (IFS), said: "Jeremy Hunt will still have to make some scary decisions on tax and spend [in his economic statement on 31 October] this Halloween. Paul Johnson, director of the Institute for Fiscal Studies (IFS), said there were no "easy options" and Mr Hunt would still have to make "scary decisions" by either raising taxes or cutting spending in his economic statement on 31 October.
"There are no easy options here," he added. "It is hard to see which of the big chunks of spending - health, pensions, welfare, education and defence - can be cut." "It is hard to see which of the big chunks of spending - health, pensions, welfare, education and defence - can be cut," he added.
'Big deal for households' The Resolution Foundation warned spending cuts could be as deep as those after the 2008 financial crisis when lending ground to a halt and the country went into a deep recession.
The Resolution Foundation warned spending cuts could be as deep as those after the 2009 financial crisis, and that middle-income families may be unable to pay energy bills next year after the support package U-turn.
The foundation's chief executive, Torsten Bell, told the BBC's Today programme: "If we are talking of spending cuts between £30-40bn then they're not that far off the scale of the cuts announced by George Osborne back in 2010."
On the scaling down of energy support, Mr Bell added: "If [the chancellor] did scrap all of that he's saving up to £40bn, but it's a big deal for households too because our bills are due to hit £4,000 in April.
"I think really £4,000 is so large that even middle-income households won't be able to afford those bills next year.
"So he's done the easy bit, scrapping the existing scheme, what he's got to do is some hard work about how he intends to provide support for lower and middle-income households next year."
What is the black hole in the public finances?What is the black hole in the public finances?
The Institute for Fiscal Studies (IFS), an economics think tank, had warned that the government faced having to make "big and painful" spending cuts to put the country's finances on a sustainable path. After September's mini-budget, the IFS had warned that the government faced having to make "big and painful" spending cuts to put the country's finances on a sustainable path.
Before My Hunt's announcement, it calculated the government would have to spend £60bn a year less by 2026-27, even taking into account an earlier U-turn over the top rate of income tax.
Governments do borrow from investors to fund spending in difficult times. But a shortfall in the government budget, often dubbed a "black hole", can make investors nervous if it is not clear that it is a temporary measure.Governments do borrow from investors to fund spending in difficult times. But a shortfall in the government budget, often dubbed a "black hole", can make investors nervous if it is not clear that it is a temporary measure.
Rising borrowing also comes with a price tag attached - interest bills that rise as inflation does too. For this reason, governments usually avoid borrowing to cut taxes or spend more at times when inflation is high.Rising borrowing also comes with a price tag attached - interest bills that rise as inflation does too. For this reason, governments usually avoid borrowing to cut taxes or spend more at times when inflation is high.
Why did Mr Hunt have to act?Why did Mr Hunt have to act?
Immediately after Mr Kwarteng's mini-budget in September, rates of interest for government borrowing shot up to worrying levels as the UK was deemed a higher risk to lend to.Immediately after Mr Kwarteng's mini-budget in September, rates of interest for government borrowing shot up to worrying levels as the UK was deemed a higher risk to lend to.
Between the soaring cost of living and higher borrowing rates, the government faced paying interest of over £100bn on existing debt next financial year - twice what was expected just a few months ago.Between the soaring cost of living and higher borrowing rates, the government faced paying interest of over £100bn on existing debt next financial year - twice what was expected just a few months ago.
That is equivalent to over a fifth of departments' budgets for day-to-day provision of public services - it is money that could be used for schools or hospitals in theory instead.That is equivalent to over a fifth of departments' budgets for day-to-day provision of public services - it is money that could be used for schools or hospitals in theory instead.
It also pushed up borrowing costs for businesses and individuals, including for mortgages. And it sent financial markets into a tailspin as the value of government bonds plummeted, forcing the Bank of England to step in to protect pension funds.It also pushed up borrowing costs for businesses and individuals, including for mortgages. And it sent financial markets into a tailspin as the value of government bonds plummeted, forcing the Bank of England to step in to protect pension funds.
What is the plan?What is the plan?
Mr Hunt's new strategy will mean more money coming into the Treasury's coffers, reducing the need for severe cuts to spending on services such as the NHS, education and defence.Mr Hunt's new strategy will mean more money coming into the Treasury's coffers, reducing the need for severe cuts to spending on services such as the NHS, education and defence.
The government's stated aim is to not be spending any more than it is receiving in tax receipts by the 2026-27 tax year, in order to keep the overall burden of debt at current levels.The government's stated aim is to not be spending any more than it is receiving in tax receipts by the 2026-27 tax year, in order to keep the overall burden of debt at current levels.
The chancellor said savings of £32bn would be made by 2026-27 by:The chancellor said savings of £32bn would be made by 2026-27 by:
Keeping plans to raise corporation tax to 25% (raising £18.7bn)Keeping plans to raise corporation tax to 25% (raising £18.7bn)
Keeping the basic rate of income tax at 20p, rather than cutting it to 19p next year (£5.9bn)Keeping the basic rate of income tax at 20p, rather than cutting it to 19p next year (£5.9bn)
Keeping a planned increase to the tax on dividends (£0.9bn)Keeping a planned increase to the tax on dividends (£0.9bn)
Shelving changes to IR35 rules for freelance workers (£2bn)Shelving changes to IR35 rules for freelance workers (£2bn)
Cancelling a plan to offer tax-free shopping to tourists (£2.1bn)Cancelling a plan to offer tax-free shopping to tourists (£2.1bn)
Allowing alcohol duties to rise instead of being frozen (£0.6bn)Allowing alcohol duties to rise instead of being frozen (£0.6bn)
But it still leaves a £28bn shortfall, if the government is to meet its commitment to balance the books over the next three years.But it still leaves a £28bn shortfall, if the government is to meet its commitment to balance the books over the next three years.
Mr Hunt also announced that support for every household's energy bills, which will cost an estimated £60bn over this winter, will remain in place until April, but after that the scheme will be reviewed to see if cost savings can be made.Mr Hunt also announced that support for every household's energy bills, which will cost an estimated £60bn over this winter, will remain in place until April, but after that the scheme will be reviewed to see if cost savings can be made.
Mr Hunt also said he was forming an Economic Advisory Council to provide him with "independent expert advice" as he tries to rebuild investor confidence.Mr Hunt also said he was forming an Economic Advisory Council to provide him with "independent expert advice" as he tries to rebuild investor confidence.