(Bloomberg) — Rishi Sunak’s pledge to repair the U.K.’s public finances means he’ll 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.
The U.K. finance minister is already facing a backlash for minimal spending cuts announced Wednesday, which only amounted to a saving of around 10 billion pounds. That’s a drop in the ocean compared with the forecast 394 billion pounds of borrowing this fiscal year, a peacetime record.
Sunak will need to raise another 27 billion pounds ($36 billion) 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 40 billion pounds if a tighter measure of fiscal sustainability is applied. Failing to secure a Brexit trade deal with the European Union would make things worse.
While finding the savings could prove tricky, economists say even his baby steps toward 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 last 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 mean taxes will rise in future,” said Torsten Bell, the think tank’s chief executive. “But which taxes those will be, like which Brexit we can expect, are questions the chancellor left for another day.”
Video: UK borrowing to hit peacetime high as economy faces COVID emergency: Sunak (Reuters)
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 pounds 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 around 10 billion pounds a year relative to plans announced in March, eliminating virus-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.”
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