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Government's Fiscal Tightrope: Balancing the Budget Through Cuts

Updated: Nov 8

Independent industry professionals have claimed Chancellor Kwasi Kwarteng will need to cut £60 billion of spending a year by 2026-27 to stabilise the economy.

The Institute for Fiscal Studies (IFS) has claimed that the current Government will need to make "big and painful" cuts to public spending to afford the proposed tax cuts announced in the Chancellor's mini-budget.


Paul Johnson, director at IFS, said:

"The Chancellor should not rely on over-optimistic growth forecasts or promises of unspecified spending cuts. To do so would risk his plans lacking the credibility which recent events have shown to be so important."

The Treasury has said its tax cuts and reforms would deliver "sustainable funding for public services".

The chancellor has promised to set out further details of his economic strategy on 31st October, three weeks earlier than originally planned, alongside a full forecast from the official Office for Budget Responsibility (OBR).

Think tank Resolution Foundation voiced skepticism over the Government's proposed £43bn tax cut package, arguing that a lack of detail about where the funding for the tax cuts will come from has led to the subsequent fall in the value of the pound.

The decision to announce the mini budget without any reports from the OBR has also contributed to this lack of faith.

Chief executive of the Resolution Foundation, Torsten Bell, said:

"Lower taxes combined with a loss of market confidence mean rising interest rates, leading to higher mortgages and lower living standards. But looking further ahead, they will mean lower spending too. Without U-turns on some tax cuts, the Chancellor has to decide which unpleasant combination of growth-reducing public investment cuts or income-reducing welfare cuts he is going to announce."

Not everyone believes that the Government will have to make any cuts to balance the economy. Richard Murphy of Tax Research UK said in response to the IFS's report: "There is, of course, no such hole: the Government can run an unfunded deficit whenever it likes using funds made available to it by the BoE. To claim otherwise is simply to deny reality. If Kwarteng wishes to borrow from the BoE in this way, then he could, and they could not refuse him.

If the Government announced a £100bn bond-buying program to fund the emergency energy price support that it is providing over the next year, using the precedents of 2009 and 2020 as a wholly justifiable excuse, the market would not be phased. And what would immediately happen as a result is that the pressure on sterling would be reduced considerably."

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