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Warning of 'scary' spending cuts after tax U-turns Warning of 'scary' spending cuts after tax U-turns
(about 1 hour later)
The new chancellor faces the "toughest" and "scary" decisions on spending cuts despite overturning 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.
Jeremy Hunt cancelled £32bn worth of cuts from last month's mini-budget in a bid to calm investors. 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.
But experts said the government still had to fill a £28bn shortfall to balance its books. The Institute for Fiscal Studies (IFS), an economics think tank, said deep spending cuts were inevitable.
The Institute for Fiscal Studies (IFS) think tank welcomed Mr Hunt's moves but said he had more work to do. The Resolution Foundation, which focuses on those on low incomes, said the "toughest choices" lie ahead.
Meanwhile the Resolution Foundation, a think tank that campaigns for people on low incomes, said that with spending cuts to find and a new energy support package to be devised for beyond April, the chancellor's "toughest choices still 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-budget
Paul Johnson, director of the IFS, said the chancellor also had to present "a coherent set of well-designed fiscal targets and a credible plan for meeting them" in his economic statement on 31 October. The former chancellor, Kwasi Kwarteng, had announced huge subsidies to energy prices and sweeping unfunded tax cuts, prompting turmoil in the financial markets.
"Jeremy Hunt will still have to make some scary decisions on tax and spend this Halloween," Mr Johnson said. 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.
What 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.
"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.""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."
Mr Hunt's strategy, which includes keeping income tax at current levels, comes after economists warned the original plans would leave a £60bn black hole in the public finances. 'Big deal for households'
Last month his predecessor, Kwasi Kwarteng, announced huge subsidies to energy prices and sweeping unfunded 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. 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.
Mr Hunt said he would be shelving almost all of Mr Kwarteng's tax changes and would look again at the way energy bills were being subsidised across the board. 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."
"At a time when markets are rightly demanding commitments to sustainable public finances, it is not right to borrow to fund this tax cut," added Mr Hunt, referring to Mrs Kwarteng's plan to bring down the basic rate of income tax by 1p. 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.
The pound rose and government borrowing costs fell after Mr Hunt's announcement. "I think really £4,000 is so large that even middle-income households won't be able to afford those bills next year.
What was the black hole in UK finances? "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?
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.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.
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. 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 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's equivalent to over a fifth of departments' budgets for day-to-day provision of public services - it's 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 Mr Hunt's 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.
Will Hunt's plan work?
Experts said his announcements still leave a £28bn shortfall, if the government is to meet its commitment to balance the books over the next three years.
Mr Hunt is expected to set out how this gap will be bridged in a fiscal statement on 31 October.
Paul Dales, chief UK economist at Capital Economics, said the chancellor announcing that more difficult decisions would need to be made on tax and public spending meant the markets were being told "that this is not just a U-turn on the mini-budget, but a complete change in the way the government is running fiscal policy".
Mr Dales warned the decision to shorten the length of the cap on energy bills to April 2023 from October 2024 meant the government would save cash, but that businesses and households would "pick up more of the tab".
"That increases economic uncertainty and may mean that inflation ends up being higher for longer next year and that the recession is deeper as a result," he added.
The IFS said despite the "scary" decisions that lay ahead, Mr Hunt may be able to delay some big decisions on public spending, having undone the big package of tax cuts.
So far, the chancellor's snap announcements on Monday have helped to calm markets. The pound rose and government borrowing costs fell on Monday, as investors welcomed the reversal of most of the mini-budget tax measures.
The news also saw the interest rate - or yield - on UK government bonds fall, making government borrowing less expensive.
Mr Hunt stressed that it was the government's responsibility to "do what's necessary for economic stability".
"Governments cannot eliminate volatility in markets, but they can play their part, and we will do so because instability affects the prices of things in shops, the cost of mortgages and the values of pensions," he said.