Kwarteng seeks savings from UK aid budget to help offset cost of tax cuts

Chancellor Kwasi Kwarteng faces Tory opposition to proposals to save £5billion a year from Britain’s overseas aid budget as he begins the politically perilous task of plugging a hole budget estimated at £60 billion.

Reducing UK government spending in the developing world is probably one of the less difficult options Kwarteng faces as he tries to prove to financial markets that he has a plan to get the UK’s debt under control. British government.

A former cabinet minister said Kwarteng’s £43bn of unfunded tax cuts and the implied spending cuts that would follow were “economically unwise and politically suicidal”. “It’s checkmate,” he added.

The Chancellor’s ‘mini’ budget on September 23 sparked market turmoil that sent the government’s borrowing costs skyrocketing and led to a slump in the ratings of Liz Truss and her administration.

Another former minister said: ‘Either they have to roll back the tax cuts – which would be politically a disaster for them – or they have to introduce catastrophic spending cuts.’

Downing Street has denied there will be a return to ‘austerity’, but many Tory MPs fear Truss and Kwarteng will be forced to implement deeply unpopular measures to pay for their tax cut plans.

Government insiders have said Kwarteng will not restore Britain’s overseas aid spending to 0.7% of gross domestic product in 2024, as predicted by one of his predecessors, Rishi Sunak.

Sunak slashed the aid budget in 2020 to 0.5% of GDP – breaking a commitment from the Conservatives’ election manifesto – but said spending would drop back to 0.7% when the underlying debt fell. He expected this to happen in 2024.

With the debt target now unlikely to be met before the next parliament, Kwarteng plans to keep the 0.5% limit, saving £5bn a year, according to government insiders.

But senior Tories have warned ministers will face a revolt. Former International Development Secretary Andrew Mitchell said: ‘Regardless of the moral and national interest, they would struggle to get it through the House of Commons.’

The Institute for Fiscal Studies, a leading think tank, estimated on Tuesday that Kwarteng would need a fiscal tightening of more than £60billion if he is to convince investors he can stabilize public finances. .

Conservative MPs fear the worst. “All my constituents hear is that we want to give tax cuts to millionaires and cut benefits and public spending,” said an MP representing a working-class constituency. “We have already lost the discussion.”

Bar chart of IFS/Citi forecast for October 2022 compared to the latest OBR forecast for March 2022 (in billions of pounds sterling) showing government spending is expected to be £100 billion higher this year and next

Kwarteng cut a somewhat lonely figure in the Commons on Tuesday as he defended the “mini” budget.

Large swaths of the Tory benches were empty, but the Chancellor pushed back on calls from Labor to rip up his pack and start over, and insisted his economic growth plan would be effective.

Rachel Reeves, Shadow Chancellor, said: ‘This is a British crisis made in Downing Street. No other government sabotages the economic credibility of its own country like this government does.

However, there is no indication that Truss will further roll back the tax cuts it claims are key to transforming Britain’s growth potential.

Last week she dropped plans to scrap the top income tax rate of 45p, reducing the amount of unfunded tax cuts from £45billion to £43billion.

A Truss ally said, “Even if it weren’t for the tax cuts, we would have to cut spending. Theresa May and Boris Johnson have spent the past six years saying ‘yes’ to everything. High taxes stifle growth.

Truss convened his cabinet on Tuesday and defended the growth plan. There was virtually no discussion of the Bank of England’s emergency interventions to avert a financial crisis centered on the government bond market.

Truss and Kwarteng have until October 31, when the chancellor will publish his new medium-term plan to cut debt alongside the new official forecast, to add up the sums and take the Tory MPs with them.

Kwarteng is expected to explain how its debt will decline as a percentage of GDP by the fifth year of the Office for Budget Responsibility forecast, so it may delay some of the detailed explanations of how it would cut spending.

But Britain’s fiscal watchdog and the markets will need to be convinced of the debt reduction plan, which means Kwarteng will be forced to face politically painful choices now.

Reducing spending at a time when high inflation is putting pressure on budgets in Whitehall – and public services are being strained by the fallout from Covid-19 – will prove “very difficult”, an insider told the government.

Slashing the huge NHS budget would be politically toxic, as resources for education and the criminal justice system come under massive pressure. Local government spending, often administered by Tory-led county councils, has already been slashed.

Meanwhile, Tory MPs have signaled they will not support cuts in real terms to social benefits. Julian Smith, former Conservative chief whip, said the government’s books could not be balanced “on the backs of the poorest people in our country”. Truss promised to protect retirees.

Some Tory MPs fear Kwarteng may ultimately have to cut infrastructure investment or even the science budget – precisely the kind of spending intended to boost Britain’s growth rate.

Few in government believe that the OBR will significantly improve its growth forecast to take into account government supply-side reforms in areas such as childcare, financial services, agriculture, immigration and broadband.

Rolling out eight separate guidance documents, dubbed Operation Rolling Thunder by Truss aides, appears to be problematic. Government officials said major planning reforms would now be postponed until Kwarteng’s budget statement on Oct. 31.

With markets still jittery and Tory MPs in agitated moods, Labor leader Sir Keir Starmer claimed the government could fall and put his party on an election footing.

Starmer, announcing a change of headquarters and a reshuffling of his advisory team, said: “The collapse of the government has given us a huge chance. The instability means they could fall at any time.