When Jeremy Hunt, the UK’s new prime minister, last week reversed most of the measures in his predecessor’s damaging “small” Budget, he still faced a public finances gap of more than 40 billion table a year.
He warned that plugging this into the Halloween financial statements would require “brightly difficult decisions”.
But more than a week later, Hunt’s measures, along with promises of financial prudence and the appointment of a new prime minister, provided financial reassurance. market and offers what some in the City call a “dull dividend”: lower long-term borrowing costs.
This has allowed prime minister Rishi Sunak and his prime minister to postpone their autumn declaration until November 17. without much adverse market reaction.
The delay has also improved the likely outlook for public finances by enabling the Office of Budget Responsibility, the fiscal watchdog, to factor in the cost of government borrowing. cheaper. The savings will be substantial, although they are likely under £10 billion a year.
But with the cost of repaying the government debt much higher than it was at the time of the Spring Declaration and a darker economic outlook, no decision by the prime minister and prime minister will be easy.
Sunak and Hunting also have to deal with the fact that spending cuts and tax increases undermine growth prospects, reducing future government revenues. This means that regardless of the size of the financial loss, the repair work is bound to be larger.
Sunak on Wednesday showed he’s willing to make high-risk decisions to close the gap, leaving open the possibility of bypassing the totem “triple pension lock” – ensuring that the state pension increases by at least 2 .5% a year, or whichever is the higher of income growth or inflation – in the hope that the economic outlook will improve before the election scheduled for 2024.
However, before the new prime minister can think about returning home, he needs to prove that he has stabilized his public finances by November 17.
This task will be easier than when announced on October 31 as OBR will no longer have to rely on government debt service cost projections based on extremely high, universal financial market prices. in early to mid-October.
At the time, Bank of England interest rate expectations had skyrocketed, touching near 6% on October 10. They are now peaking at just under 5%.
Interest rates on term bonds, which drive the government’s borrowing costs, have also fallen from 4.7% to less than 4% for 14-year bonds – the average maturity for bonds. UK government vote.
The drop in bond yields from their October 10 peak could have improved the public finances outlook by £14 billion a year had the OBR released its initial forecast on that date; however the improvement is expected to be smaller.
Government sources suggest that compared with a black hole of between £35bn and £40bn a year last week, OBR’s estimate of the fiscal issue will be closer to £30bn a year this week, although although the ministers did not receive any new updates from the fiscal. supervisory agency.
Sunak acknowledged on Wednesday that tax and spending decisions would still be “difficult,” even if the public fiscal loss was smaller. Officials now fear that every time they propose spending cuts or tax increases, some of the savings on paper will soon disappear amid worse projections of economic activity.
This means ministers are likely to be advised they should look for savings totaling almost £40 billion a year in the autumn statement, which is still a substantial sum.
Certain savings options appear. The government is more likely to freeze foreign aid at 0.5% of gross domestic product, instead of increasing it to 0.7% as previously planned. This will save £5 billion a year.
Appointing Andrew Mitchell, an advocate of higher aid spending, as development minister would limit the risk of any Tory rebellion on the issue. Mitchell has told colleagues that 0.5% of GDP is a realistic target under the circumstances.
Income tax and allowance thresholds will also be targeted. They will be frozen until the end of the five-year forecast period, Hunt thinks. them into higher bands.
Sunak on Wednesday also left the door open to the possibility that benefits and pensions could rise at below the rate of inflation next April – a move that could save up to £10 billion a year, although he emphasizing that “the most vulnerable” will be protected.
“I’ve always acted in a way that protects the most vulnerable, that’s because it’s the right thing to do and those are the values of our benevolent party.”
However, protecting vulnerable people will mean savings on welfare bills falling to £10 billion a year.
Other big money-saving possibilities include slowing down the hypothetical public spending growth after 2024-2025 when current plans expire. Reducing spending by 1 percentage point could save £13 billion a year.
Reducing investment spending could also save up to £10 billion a year, while keeping spending at a higher level than at any time in the last 30 years.
By stabilizing the market, Hunt has given himself time and hope that market prices will improve further, but the government’s outlook remains far more bleak than what appeared in the spring.
The fall proclamation may have been delayed since Halloween, but it’s still likely to scare off many Tory voters and MPs when it’s released next month.
