Rishi Sunak. Picture: WPA/GETTY IMAGES/JOHN SIBLEY
Rishi Sunak. Picture: WPA/GETTY IMAGES/JOHN SIBLEY

London — Chancellor of the exchequer Rishi Sunak’s pledge to repair the UK’s public finances means he will need to raise billions of pounds through taxes or spending cuts that economists are warning could damage a recovery from the worst slump in three centuries.

Sunak is already facing a backlash for minimal spending cuts announced on Wednesday, which only amounted to a saving of about £10bn. That’s a drop in the ocean compared with the forecast £394bn of borrowing this fiscal year, a peace-time record.

Sunak will need to raise another £27bn just to meet the “loosest” definition of balancing the books — matching day-to-day spending and revenue within five years — according to the government’s fiscal watchdog, the Office for Budget Responsibility.

That could rise to more than £40bn if a tighter measure of fiscal sustainability is applied. Failing to secure a Brexit trade deal with the EU would make things worse.

While finding the savings could prove tricky, economists say even his baby steps towards paying for the pandemic in this week’s announcement could hurt an already dim outlook for growth, according to Bloomberg Economics and Bank of America Merrill Lynch.

In a series of interviews on Thursday, Sunak declined to be drawn on future tax hikes, only indicating the need to strengthen public finances in the future. The Resolution Foundation, a London-based think-tank, said the scale of spending cuts over the past decade means the burden is now almost certain to fall on taxation.

“While the priority now is to support the economy, the permanent damage to the public finances means taxes will rise in future,” said Torsten Bell, the think-tank’s CEO. “But which taxes those will be, like which Brexit we can expect, are questions the chancellor left for another day.”

Any tightening risks heaping more pain on households already struggling during the pandemic. The crisis is on track to reduce average pay packets by £1,200 a year by 2025 compared to pre-pandemic forecasts and prolong Britain’s 15-year squeeze on household incomes, according to the Resolution Foundation.

Paul Johnson, director of the Institute for Fiscal Studies, said Sunak may find it difficult to stick to his current spending plans.

Those include cutting spending on public services by about £10bn a year compared to plans announced in March, eliminating coronavirus-related spending from 2022 and ending a temporary boost to welfare payments in April despite mounting pressure to maintain it. “It’s not obvious that the need or appetite for public spending has diminished since March,” Johnson told an online briefing. “I would be astonished if these plans were adhered to.”

Bloomberg

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