After a blizzard of media interviews to reassure jittery financial markets over the weekend, Jeremy Hunt sat down with Treasury officials to discuss how to fill the estimated £62bn blackhole in Britain’s public finances.
The new Chancellor has warned of difficult decisions ahead that affect “lots of walks of life” as he prepares households for spending restraints. But the size of the shortfall he faces, which will determine how much of Liz Truss’s radical economic agenda he has to rip up, is debatable.
While tax and spending decisions are crucial, equally important will be growth. The faster the growth, the smaller the hole Mr Hunt needs to fill.
But, as forecasters from the OBR to the Institute for Fiscal Studies often concede, gazing into the economic crystal ball is fraught with difficulties.
The Institute for Fiscal Studies (IFS) has warned the Chancellor he will have to find £62bn in 2026-27 to stabilise Britain’s debt pile as a share of GDP. If correct, not even reversing all the £43bn of tax cuts in Kwasi Kwarteng’s mini-Budget would be enough to stop debt ballooning.
But that hole shrinks considerably under scenarios where growth is even a little faster in the coming years. It could disappear altogether if growth is far quicker than expected.
“Higher sustainable growth could make a big difference,” the IFS said in its recent Green Budget.
“What matters here is not the headline amounts of growth that we get over the next year or two… but rather the underlying, sustainable, level of growth forecast into the medium term.
“Finding a way to somehow boost this would change the picture for the better and make easier some of the trade-offs facing the Chancellor.”
To calculate its fiscal forecasts, the IFS uses economic projections from US investment bank Citi.
Its economists predicted that the economy will contract two years in a row with GDP expected to fall 0.6pc in 2023 and a further 0.2pc in 2024. Over the next five years Citi believes growth will average just 0.8pc but said that a rosier picture on gas prices could boost the outlook.
The IFS says that if growth is just 0.25 percentage points per year quicker, the hole is reduced to £41bn. If growth is 0.5 percentage points faster, the fiscal tightening needed to stabilise debt shrinks to £21bn and it disappears altogether in an even more optimistic scenario where growth is 0.75 percentage points quicker.
The £21bn difference between the central prediction and even just the slightly more optimistic scenario is roughly equivalent to the £19bn cost of cancelling the increase in corporation tax from 19pc to 25pc. That was the most expensive part of the mini-Budget and the plans to cancel the rise have already been axed by Ms Truss.
The IFS’s economists said that slightly quicker growth is “within the realms of possibility” but caution that far faster growth is unlikely under current “policy settings” and forecasts.
Was Citi too gloomy and could the OBR be more upbeat on Britain’s growth prospects?
The latest monthly consensus of forecasts released by the Treasury suggests that City economists expect growth of 0.1pc next year, a slightly better prediction than the contraction expected by Citi.
A more optimistic scenario for borrowing was also presented by the Centre for Economics and Business Research, which projected a small surplus by 2025/26 after arguing that officials have overestimated the cost of the tax cuts plan.