5 ways to close the £40bn hole in UK finances – – DeathInTown

New Prime Minister Jeremy Hunt warned this week that he will have to make “tearfully difficult” decisions to balance the government’s books.

Mr Hunt is looking to close a £40bn fiscal hole in the 31st October budget with tax increases and spending cuts, with new fiscal rules well ahead of the projected 2027-2028 deadline. We are making it available.

He said on Monday that he wants public debt to fall as a percentage of gross domestic product, that tax revenues should exceed daily spending, and that it will likely take five years to reach those targets. Below are some of his options for increasing taxes and cutting spending.

Increase taxes on people and businesses

When then-Prime Minister George Osborne launched the “era of austerity” after the financial crisis, his fiscal consolidation was based on an 80:20 ratio of spending cuts and tax increases.

A source close to Hunt said Mr Hunt believes the tax hike will require much more work this time around, perhaps half of the £40bn cut.

A significant “stealth” tax increase could be achieved by extending the four-year freeze on personal tax credits and thresholds announced by Prime Minister Rishi Sunak in 2021.

When inflation is high, the “fiscal drag” effect drags millions of people into the tax system for the first time each year, or into higher tax brackets. Extending the freeze would give him around £5bn a year from 2027 to 2028.

Hunt is also expected by allies to push banks and energy companies to pay more taxes on their profits.

Reduction of pension and benefits

Ministers are woken up on Wednesday by nasty news: September’s inflation rate will be released at 7am. This value usually determines the annual increase in his next April pension and welfare benefits. It is expected to be 10%.

That alone means next year’s public spending will be £5bn higher than the March budget plan, leaving Hunt with the dilemma of whether to save money by shrinking benefits for both pensioners and non-pensioners. .

Mr Hunt on Monday declined to guarantee that benefits would increase in line with inflation after next April, and refused to say he would respect the government’s “triple lock” of public pensions. cents, whichever is higher.

Each percentage point that benefits are cut saves the government about £3 billion a year. Some Tory MPs — including right-wing business secretary Jacob Rees-Mogg — have indicated they do not support substantial cuts in benefits.

Reduced spending by the Whitehall department

The Treasury Department has said the government sector will have to live within the budget finalized in the last spending review, which set annual totals for 2024-2025.

These budgets are already putting pressure on public services as high inflation affects wages and other spending. It will cost £18bn a year to fully compensate the sector for these additional bills by 2024-2025.

Hunt’s priority is not to spend extra money before the next election, due by January 2025. But he could lower his projected growth rate for daily spending on public services in the next Congress. It is currently set at 3.75% per annum. Nominally.

This could be reduced by 1 percentage point as spending is still rising in real terms. Such cuts, if implemented for three years, could save him £13 billion a year by 2027-28.

But ministers in charge of the appropriations department are likely to resist any pressure. suggested.

Reduction of capital investment

The traditional first step in reducing public spending is often to reduce investment by delaying projects rather than canceling them.

For example, in 2009, Labor Prime Minister Alistair Darling took the knife on capital spending. Recent Conservative prime ministers have defended the government’s capital budget.

Public sector net investment is set at around £70bn a year over the next few years, but could fall to £5bn to £10bn, but remains substantially higher than in the pre-corona period stay.

One problem with the investment cut is that Hunt came close to ruling it out on Monday. “I don’t think there can be a long-term, reliable economic growth strategy that doesn’t recognize the importance of capital investment,” he said.

Cuts in foreign aid budgets

Perhaps the biggest spending cut for Hunt, and the least politically contested with Conservative MPs, is saving £5 billion a year from the UK’s foreign aid budget.

Hunt’s allies don’t expect Hunt to return UK foreign aid spending to 0.7% of GDP in 2024, as Sunak had planned.

Sunak cut the 2020 aid budget to 0.5% of GDP — breaking a pledge in the Tory election manifesto — but said spending would return to 0.7% as underlying debt fell. I expected this to happen in 2024.

This target on debt is unlikely to be met until the next Parliament, so maintaining the 0.5% cap will save £5bn a year. Former Secretary of International Development Andrew Mitchell said there were “moral and national interests” in returning to the 0.7% target.