Kwasi Kwarteng faces a tough choice between severe cuts in public spending or reversing his tax-cutting plans, according to a new report.
The UK is facing a ‘moderate but protracted over the next two years’, according to the Institute for Fiscal Studies.
The government’s mini-budget has a £62 billion black hole in the public finances that may require the kind of austerity imposed a decade ago.
This should force the Chancellor to either impose cuts in public sector services or abandon his mini-Budget giveaways.
Talk of spending cuts is already causing anger among Tory backbenchers who say there was never any prospect of such an outcome in the leadership campaign.
“The chancellor should not rely on over-optimistic growth forecasts or promises of unspecified spending cuts,” said Paul Johnson, director of the IFS. “To do so would risk his plans lacking the credibility which recent events have shown to be so important.”
The IFS’s “Green Budget”, produced with investment bank Citi, notes that the shortfall is a direct consequence of the budget measures, including the reversal of planned increases in corporation tax and National Insurance, and its Energy Price Guarantee.
The IFS said the change of the gap being filled by economic growth would depend more on luck than judgement.
It said the Office for Budget Responsibility (OBR), the government’s in-house forecaster, was unlikely to assume that the measures in Kwasi Kwarteng’s mini-budget would boost the country’s long-term growth prospects.
Details of the government’s fiscal plans will be published alongside the OBR’s forecasts on 31 October after the Chancellor agreed to bring forward his medium-term plan from 23 November.