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OBR Forecasts: £60-£70bn Hole Post Kwarteng’s Mini-Budget

Updated: Dec 25, 2023

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Kwasi Kwarteng has received independent financial projections for the UK that are anticipated to reveal a more than £60 billion gap caused by his expansive tax cuts and a dramatically dimming growth outlook.

The Office for Budget Responsibility (OBR) presented the chancellor with its initial estimates for the economy and public finances on Friday, capping off a trying week for Liz Truss' administration. These predictions are expected to be pessimistic.

Former Bank of England deputy governor and independent watchdog member Sir Charlie Bean predicted that the report will likely reveal a sizable deficit for the exchequer.

He added that Kwarteng would have three choices: make further U-turns on his tax-cutting plans, make significant cuts to public spending, or risk the wrath of already uneasy financial markets by significantly increasing the national debt. He predicted that it would be in the range of £60 billion to £70 billion compared to previous forecasts.

He'll have to deal with the severity of the public finances' decline since the spring, which, in all honesty, I don't believe most observers and MPs have really realized.

It will be intriguing to see what the chancellor comes up with and what he can conjure up. They could reverse course on the tax cuts they promised a week ago, but I'd suggest it would be politically disastrous for the Truss administration.

Despite pressure from rebellious backbencher Conservative MPs calling for an early release of the projections for economic growth and the public finances, the Treasury was jealously guarding the specifics of the OBR forecast on Friday

The predictions are said to take into account the £43bn of unfilled tax commitments disclosed by Kwarteng late last month, after the Treasury watchdog was sidelined by the chancellor for his mini-budget, one of several actions blamed with spookily the financial markets.

It is believed that the chancellor is working on solutions to partially offset the public finances' shortfall, which will be disclosed in a fiscal statement simultaneously with the publication of the OBR estimates. Although scheduled for November 23, the chancellor is anticipated to inform parliament the following week that the event will now take place before the end of October.

Kwarteng will give the OBR an update on his intentions for the upcoming weeks after getting the preliminary projections on Friday. The watchdog will then include them in a final forecast that will be released with the fiscal statement.

Analysts at Deutsche Bank predicted that Kwarteng will utilize spending cuts of between £25 billion and £30 billion over the following three fiscal years to close the gap. However, following a decade of austerity and rising demand for public services, such a move would be politically contentious.

Additionally, it stated that this would still leave the government's budget deficit, or the difference between public spending and revenue, at or near £185 billion this year, as opposed to the OBR's forecast from March of a £99 billion shortfall. Although the deficit might drop to £155 billion the next year, it would still be higher than expected by more than £100 billion.

The OBR predicted in the spring that the government would have headroom of roughly £30 billion to achieve its goal of reducing the UK's national debt as a percentage of GDP. But Bean claimed that since then, inflation has increased considerably, driving up the cost of borrowing money from the government and causing a significant slowdown in the economy.

The former OBR member, who examined the tax and spending plans of three consecutive chancellors before stepping down in December last year, said this meant £30bn of headroom was probably now at least a £30bn shortage. He said that the overall magnitude of the hole in the UK's finances could be determined by adding Kwarteng's tax cuts to this figure.

Tax reductions, according to Kwarteng, might spur economic growth and improve the state's budget. He has set a 2.5% annual growth goal.

However, Bean claimed that the OBR would also disagree, calling this a "fairy tale." The publication of scenarios outlining how higher growth rates can improve governmental budgets is also a possibility.

The Bank of England will set interest rates early next month after reviewing the specifics of the chancellor's mini-budget. One of the Bank's four deputy governors, Dave Ramsden, claimed that the mini-budget had a "substantial" economic impact that it would be compelled to consider when determining borrowing prices.

He claimed that there had been four successive "shocks" for the British economy: the mini-budget, the turmoil in financial markets witnessed in its wake, rising energy costs, and labor shortages. He implied that the Bank would be compelled to take harder action to contain inflation.

The main driver of both, according to him, was the energy price shock. "The picture you get is of successive upwards revisions to inflation and successive downwards revisions to growth," he added.

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