ECONOMISTS have questioned the assertion that a “black hole” in the UK’s public finances will need to be filled with austerity measures and tax rises.
There has been much speculation over what Jeremy Hunt will announce in his financial statement on November 17, after the much-anticipated plan was pushed back.
The Progressive Economy Forum said the £50bn “hole” disappears entirely if debt is calculated differently.
The Government previously used a different measure of debt and going back to using that would leave £14bn to spare according to research.
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The Treasury said public finances would be assessed independently. Media discussion of the Government’s tax and spending options has been dominated by talk of a “black hole” in public finances.
This has been put at anything from £35bn to £60bn which, ministers suggest, can only be “filled” through spending cuts or tax rises.
However, economists said that “fiscal hole” is the difference between an uncertain forecast regarding how much the Government will spend and borrow under current plans and what it can afford to do to hit its targets.
Should the economy grow faster, the “hole” can decrease or grow in size dramatically more than it would because of spending cuts or tax rises.
Economists Jo Michell and Rob Calvert Jump used official forecasts from the Office for Budget Responsibility to conclude that small changes in forecasts for interest rates and growth, along with what is counted as government debt, can dramatically alter the size of the “black hole”.
During his time as chancellor, Sunak used a different method of accounting in 2020 and 2021 to arrive at the figure for government debt.
According to the economists’ analysis, changing the current method back to what it was before the autumn statement in 2021 completely removes the “black hole” and would put debt back on a more stable footing.
Mitchell said: “These results show that the Government is basing its economic policy on very shaky foundations. The case for austerity spending cuts is that the ‘fiscal hole’ must be closed.
“But if the ‘hole’ disappears with small changes in forecasts or accounting rules, it is not a reliable basis for economic policy changes, especially of the size the government is reportedly considering.”
The report adds that a small increase in the government’s forecast borrowing costs makes the “hole” larger and the path of future debt less sustainable. It added that this would mean the fiscal target is “useless”.
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Calvert Jump said: “There is now a consensus among economists that austerity does significant damage to an economy’s potential, undermining growth, as the experience of t the last decade in Britain has shown us.
“Further austerity will do far more damage than a ‘fiscal hole’ that disappears with tweaks to models or accounting rules.”
A Treasury spokesperson said that the OBR would conduct an independent assessment of the public finances.
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