![]() That makes big hikes in interest rates less appropriate for controlling inflation. This inflationary episode has been driven largely by a supply-side shock. The fact that fiscal and monetary policy are now in clear conflict increases uncertainty and makes the job of the Bank of England harder. But there are risks on the downside too if inflationary expectations become embedded.Ĭiti believes that inflation will peak near 12% but that the Bank of England’s policy rate may peak at just 4.5%, below what markets are pricing in. A big fall in gas prices could make the outlook significantly rosier. That reflects a severe terms-of-trade shock which has raised import prices much more quickly than export prices, a historically big squeeze on household budgets, and a supply of both labour and capital that is struggling to respond to swift economic change. While we should hope and aim for better growth, the rationale for an independent OBR is to ensure that politically motivated wishful thinking is not incorporated into economic and fiscal forecasts.Ĭiti’s forecasts suggest slow economic growth over the next five years averaging just 0.8% a year. His problem is that financial markets are not likely to be impressed by plans predicated either on an unlikely uptick in growth or on vague promises of public spending cuts far into the future. That might have been a more credible strategy, though, if the Chancellor had not already announced such big permanent tax cuts. Growth could turn out better than expected, and there is a case to be made that decisions would be better delayed until things settle down. The precise figures here are less important than the need for a credible strategy and plan for fiscal sustainability. ![]() But even if the OBR were to assume an additional 0.25 percentage points of growth each year – a big increase – a tightening of approximately £40 billion would still be needed by 2026–27 (equivalent to reversing almost all the ‘mini-Budget’ tax cuts). Faster growth would definitely help, and the government’s focus on this is welcome. There is, of course, huge uncertainty around exactly how much policy action will be needed given that forecasts for economic growth are highly uncertain in current turbulent times. But promising a tightening on this scale through spending cuts alone, without actually specifying which budgets would be cut, risks stretching credulity to breaking point at a time when the government’s fiscal strategy is under intense external scrutiny, not least from the financial markets on which government borrowing depends. The Chancellor might, through some such combination, find a way to have debt stabilised in the final year of his forecast without rowing back on any more of his recently announced tax cuts. By way of illustration, given current economic forecasts, even indexing working-age benefits to growth in earnings for two years (£13 billion cut) and returning investment spending to 2% of national income (£14 billion cut) would leave him needing to cut 15% from non-NHS, non-defence day-to-day public service spending to deliver the required tightening through spending cuts alone. ![]() The core conclusion of this year’s IFS Green Budget, funded by the Nuffield Foundation and in association with Citi, is that, on a central forecast, he would need to announce a fiscal tightening of more than £60 billion just to stabilise debt as a fraction of national income in 2026–27.Ĭuts on this scale would require some big choices. The Chancellor, Kwasi Kwarteng, has promised a Fiscal Plan ‘to get debt falling in the medium-term’. ![]()
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