Chancellor prepares between £30bn and £35bn of public spending cuts
Treasury officials and the Office for Budget Responsibility have told the Chancellor that the fiscal black hole is somewhere between £50bn and £60bn, and that at least three-fifths of measures to fill that hole will have to come from public spending cuts, if he and the PM want to honour what they see as the most important Tory manifesto commitments.According to a source, officials presented options to Jeremy Hunt over the weekend for how to find £35bn of spending cuts and £25bn of tax rises, if the hole is £60bn, and for a split of £30bn of spending cuts and £20bn of tax rise if the Office of Budget Responsibility finally settles on a hole of £50bn.Before I get on to more detail of Hunt's and Rishi Sunak's plans, it is worth noting that the Autumn Statement in just over a week will create a significant political headache for Labour.
Because most of the planned spending cuts will fall after the general election, and Labour will therefore have to decide whether to adopt them.In other words, it will have to decide within weeks whether to abandon or defer very important policies, notably its pledge to spend £28bn per year on green investments - which is the heart of its environmental and economic plans.Given that Keir Starmer, Labour's leader, has spent recent weeks criticising the government for sidelining the independent Office for Budget Responsibility when formulating its disastrous mini-budget of huge tax cuts, he won't be able to dismiss the OBR's calculations of the fiscal gap as irrelevant.
He will be under pressure to say how he would fill it, if he won't accept Tory spending cuts.The reason the Chancellor is looking at disproportionately bigger spending cuts is that he and the prime minister are keen to honour the central "guarantees" of the Tory party's 2019 general election manifesto.So they do not want to put up the rates of income tax, national insurance or VAT. And they want to honour the "triple lock" commitment to increase the basic state pension by the rate of inflation.These promises box them in, with regard to how much they can raise from tax, or save from the pensions bill.Strikingly, it is however still an option for the Autumn Statement on 17 November to increase benefits and universal credit in line with the lower rate of average earnings growth rather than by 10.1% inflation.If this real cut in benefits were to happen, many Tory MPs and ministers will feel let down.As for the longitudinal distribution of spending cuts, most will fall after the general election.Before then, departments will be told they have to stick to their existing spending ceilings, even though their effective spending power has been massively reduced by inflation - and even though they are facing huge pay claims from public service workers (such as nurses in the NHS).Tax increases that now look a racing certainty include:1) Broadening the scope of the existing windfall tax on oil and gas producers to include businesses generating electricity from wind, solar and nuclear, extending the duration of the tax to five years and increasing its rate by five percentage points.2) Leaving the special levy on banks at 8%, rather than cutting it to offset the planned six percentage point increase in corporation tax.A possible tax-raising measure would be to increase higher rate tax relief on pension contributions.
This would bring in £12bn a year, but I am told it is in the "less likely" category.Treasury sources are keen to point out that the revised windfall tax is not a "silver bullet", because fluctuations in the gas price means its proceeds are inherently uncertain.
The OBR is bound to point out the uncertainties attached to this tax.Or to put it another way, in the words of a source, even with most of the hole filled by spending cuts, "there will have to be significant additional tax raising measures".
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