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Truss May Need to Match Brutal 2010 Cuts to Win Market Faith

(Bloomberg) — Prime Minister Liz Truss is under pressure to cut spending on the same scale as George Osborne’s infamous austerity drive of 2010 in order to stabilize the UK public finances and win back the confidence of investors.

Cuts to benefits, infrastructure projects and departmental spending totaling up to £47 billion ($52 billion) will be needed to bring the national debt under control, comparable to the austerity Osborne imposed during the financial crisis, the Resolution Foundation said. Bloomberg Economics projected the cuts may even need to exceed Osborne’s since borrowing costs have rocketed following the backlash against Truss’s package of tax cuts

Chancellor of the Exchequer Kwasi Kwarteng last week set out an unfunded £45 billion tax giveaway, on top of an energy bill rescue plan costing over £100 billion across two years, with no details on how to balance the books. The plan sparked a run on the pound and sent market interest rates soaring.

The government has pledged to set out its plans for balancing the books in late November but is under pressure to bring that date forward in order to restore confidence.

Truss on Thursday insisted she’s sticking to tax cuts that she has made the centerpiece of her proposition for governing the UK. She has about two years before the next election is due, but the market slump and polls showing a massive lead for the opposition Labour Party may force the issue before then.

Truss faces Tory party members at their annual conference next week. Before then, she is due to hold an emergency meeting with OBR officials on Friday, the Guardian reported.

Read More: Britain’s Crisis of Confidence Was Years in the Making

Here are some of her options:

Benefit Cuts

Potential Savings: £5-10 Billion

Having lowered income tax for the richest 600,000 Britons, the idea of cutting benefits for the poorest might seem politically tin-eared. But on Thursday Kwarteng said it would be “premature” to decide whether benefits payments should keep up with inflation.

The financial attraction is clear. In April social-security payments are supposed to increase in line with the inflation rate from the previous September, implying a jump of 10%. Former Chancellor Rishi Sunak pledged to honour that commitment. If benefits were pegged to earnings instead of consumer prices, that would halve the bill and save £10 billion, according to Resolution.

If Kwarteng wantd to protect pensioners, a key source of Tory votes, he could focus the cuts on working-age claimants and still save £5 billion. Other reforms, such as tightening the criteria for accessing payments could save a few hundred millions of pounds, Tony Wilson, director of the Institute for Employment Studies, said.

Lower Infrastructure Spending

Potential Savings: up to £25 Billion

Another option might be to reduce public investment to the level that prevailed between 1996 and 2016, Resolution said. The previous Tory government led by Boris Johnson made a virtue of investment, committing almost 3% of GDP a year to public works such as new hospitals and schools. Returning to past levels would save £25 billion, but the plan would hit growth and fly in the face of Truss’s aim of lifting productivity.

Public-Sector Job Cuts

Potential Savings: £10 billion

Kwarteng and Truss have stressed that they will find “efficiencies” to control public spending. Jacob Rees-Mogg, the business secretary who was previously in charge of government efficiency, has already called on departments to cut about a fifth of the 475,000-strong civil service workforce, which the government has said could save £3.5 billion a year.

It may seek further savings by setting out plans to shrink the wider public sector workforce, which ballooned by 250,000 to 5.5 million over the pandemic — pushing the annual wage bill up by 20% to £165 billion.

As chancellor between 2010 and 2016, Osborne shrank the public sector workforce by about 400,000. Reducing the headcount to pre-pandemic levels, half the cut Osborne delivered, would save around £10 billion.

Sanjay Raja, UK economist at Deutsche Bank, is looking for £15 billion of savings from workforce cuts. That idea potentially has the added benefit of easing inflationary wage pressures in the private sector, where employment is still below pre-Covid levels and employers are struggling to hire staff.

Departmental Cuts

Potential Savings: Zero

The administration has already decided to stick with the spending limits set for government departments in 2021. Since then the surge in inflation has meant that last year’s cash plans are effectively a squeeze on budgets anyway. To protect front-line public services, departments are going to have to find internal savings and that makes any further cuts improbable.

Accounting Trickery

Potential Savings: Unlimited

A favorite ruse of Osborne’s when facing difficult fiscal trade-offs was to promise large unspecified spending cuts in the last year of the forecast. Truss could propose something similar for the year after the next election is due in 2024. That would be dangerous, however, given the government needs to win back trust in the markets.

Osborne’s trick allowed him to meet his fiscal rules but exposed him to accusations of false accounting by the independent Office for Budget Responsibility. Truss and Kwarteng are already on thin ice there after the OBR was sidelined for last week’s fiscal announcement.

Growth Forecasts

Potential Savings: up to £11 Billion

The government said in its Growth Plan that a 1 percentage-point increase in the UK’s GDP growth rate would reduce borrowing by £47 billion after five years. In other words, growth would do all the work of fixing the public finances.

The government is planning radical reforms that it hopes will unlock more economic potential, but the OBR is the arbiter of just how much extra activity can be factored in and is unlikely to increase its estimates of growth potential much. Its assessment of UK trend growth, at 1.8%, is already above average. Bloomberg Economics says its just 1.2%.

Should the OBR increase its estimate of trend growth by 0.25 percentage points, which economists would consider a big move, the fiscal benefit after five years would be just £11 billion.

(Updates with report of meeting with OBR)

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