CEBR says Kwarteng cuts ‘less out of control’
Chancellor Kwasi Kwarteng received a glimmer of support today after a leading think-tank said his package of tax cuts will be less of a burden on public borrowing than the markets believe.
Markets went into over-drive after last Friday’s mini-budget was judged a disaster for public finances, driving down the pound and forcing the Bank of England to re-start the purchase of bonds.
But the Centre for Economics and Business Research said “public borrowing may be less out of control than the markets think.”
It said forecasts that the tax package would cost the taxpayer £45bn are “overblown” and is more likely to come in at around £25bn.
The potentially softer impact of the Chancellor’s measures came as the Office for Budget Responsibility confirmed that next Friday (7 Oct) it will deliver the first version of a forecast ahead of Mr Kwarteng’s medium term plan on 23 November.
Opposition MPs and some Tory backbenchers want him to bring it forward, but the OBR meeting is being seen as an attempt to reassure markets that the PM and her Chancellor are taking fiscal responsibility seriously.
The pound rebounded in early trade, after official figures showed the UK had not in fact fallen into recession as claimed by the Bank of England.
However, the currency fell back again after it emerged that the Treasury had not asked the OBR to speed up the delivery of its economic forecast and had rejected an offer to produce one before the mini-budget.
Sterling was trading at around $1.11, compared to Monday’s low of $1.03.
The CEBR report offered some relief to the Chancellor and Prime Minister who have refused to contemplate rowing back on their tax-cutting policies.
The forecaster believes the Treasury has overestimated the borrowing impact of scrapping the top rate of tax and the reintroduction of VAT relief for tourists.
CEBR deputy chair Doug McWilliams said: “CEBR has done detailed research on the cost of the reintroduction of the VAT relief and our estimates show that this will raise revenue, not cost the £2bn in the Treasury sums, as the UK will attract additional numbers of tourists.”
He adds that the Treasury figures produced alongside Mr Kwarteng’s statement take no account of fiscal drag, noting that income tax will go up for those on incomes below £155,000 as a result of fixed thresholds.
And the CEBR also note that the price of energy is falling, reducing the impact of the government’s energy price guarantee on UK borrowing.
“It seems inconceivable that had UK corporation tax been raised to one of the highest levels in the western world it would have brought in anything like the extra £19bn that the Treasury have estimated for 2026/2027.
“A figure around half that seems a much more plausible estimate.”
The CEBR’s initial estimate of government borrowing in 2023/24 was £154bn but their new calculations suggest it will instead be around £64bn.
“It would appear that the Chancellor has managed to burn his reputation for fiscal prudence for no good reason at all. He would have been so much better advised to have done his sums before presenting his budget to the markets,” McWilliams says.