Facing a Fiscal Squeeze: UK’s Looming Budget Crisis Amidst Tax Hikes and Spending Cuts

Foreboding financial outlook as tax increases and budget reductions seem imminent

Sky News' Ed Conway notes that the chancellor has another option to gain some leeway concerning her budgetary guidelines.

Economics and data editor @EdConwaySky

Thursday, August 22, 2024, 8:

Do you recall the "severe economic legacy" that the current administration frequently mentions?

At the start of the summer, Rachel Reeves released a report indicating that the condition of the UK's economy and government finances was extremely poor, far beyond what was anticipated. As a result, she indicated that substantial actions, including considerable tax increases, would be necessary in the upcoming autumn budget.

Since that time, the economic updates have generally been quite positive. In fact, inflation has remained so low that the Bank of England recently decided to lower interest rates earlier this month.

The most recent figures for gross domestic product (GDP), which is the most comprehensive indicator of economic performance, reveal that the UK's economy is not only avoiding a recession but is actually expanding at a solid rate.

Certainly, after ranking as the second-least rapidly expanding economy among the G7's major industrial nations in 2023, Britain has emerged as the quickest growing economy within this group during the initial half of 2024.

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Many individuals are pondering if the new administration might be exaggerating somewhat.

Could they simply be trying to score political points against the former administration?

This morning's update on public finances reveals a scenario that aligns more closely with Reeves' perspective than with other recent data points.

It's crucial to delve deeper than the aggregate borrowing data. By doing so, one can uncover several important details.

Firstly, although the economy is expanding more quickly than anticipated, this growth is not translating into a significant increase in tax revenues, which is typically the case.

According to data from the Office for National Statistics, revenue levels are essentially matching the projections made by the Office for Budget Responsibility for this period.

In March, the Office for Budget Responsibility predicted that by July, the government's tax revenue would reach approximately £327 billion. However, the actual figure reported today is slightly lower, at £326 billion, indicating no significant surplus.

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However, when examining its expenditures, the situation appears somewhat more severe. The Office for Budget Responsibility had predicted that government spending would reach approximately £396 billion at this stage of the year.

Instead, it has already expended £405 billion.

It's generating lower revenue than anticipated and incurring higher expenses than planned. Moreover, this budget overrun, though it may seem small, amounts to £9 billion.

However, note that £9 billion is exactly the margin the government has before it violates its financial regulations, which highlights the problem.

Remember, this information covers just the initial four months of the fiscal year. Should these patterns persist, the disparity may widen even further.

Based on the latest figures on public finance, it seems the chancellor has already made up his mind about the next steps, as sources in Whitehall tell me: the upcoming October budget will likely see an increase in taxes and further reductions in spending.

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I've heard it's going to be quite unpleasant.

It should also be noted that the chancellor has another option to increase her fiscal leeway, which involves altering the specific benchmark used to assess this margin.

Many economists argue that the net debt figure passed down from the Conservative party is not appropriate for her fiscal guidelines. They suggest she should consider the total national debt of the country, without omitting the debts held by the Bank of England.

In brief, I've heard that she's thinking about adopting a different approach, which would significantly increase her flexibility.

Despite this, anticipate that she will maintain her stance during the October budget, where further unfavorable updates are likely to emerge.

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