Business
Big and painful cuts needed to fix budget
The chancellor will need to make “big and painful” spending cuts to put the country’s finances on a sustainable path, the Institute for Fiscal Studies think tank has warned.
With a weaker economy and promised tax cuts, there will be a large shortfall in revenue, the IFS predicts.
It calculates the government would have to spend £60bn a year less by 2026-27.
However, the Treasury said its tax cuts and reforms would deliver “sustainable funding for public services”.
In a new report, the IFS outlines the scale of the cuts necessary to make the sums add up over the next five years, using an illustrative example.
It suggests Chancellor Kwasi Kwarteng could:
- increase working-age benefits in line with average earnings rather than inflation for two years to save £13bn
- limit public investment to 2% of national income, to save £14bn
- cut the budgets of every government department except health and defence by 15%, to save around £35bn
Mr Kwarteng and Prime Minister Liz Truss have argued focusing on measures to promote growth will help plug the shortfall between income and outgoings.
The chancellor has promised to set out further details of his economic strategy on 31 October, three weeks earlier than originally planned, alongside a full forecast from the official Office for Budget Responsibility (OBR).
That change of timetable came after the markets baulked at the strategy announced in last month’s mini-budget.
It outlined large tax cuts and a huge package of support with energy costs without details of how they would be paid for, and without the usual assessment of their impact from the OBR.
The IFS, a politically independent economics-focused think tank, has published its own assessment of the chancellor’s strategy, in what it names a Green Budget, after the consultation green papers issued in Parliament.
It calculates that, if the planned tax cuts are not reversed, the chancellor would have to cut spending on benefits, public services, and investment sharply if he wants to stick to his commitment to balance the budget in the medium term, rather than see debt continuing to rise.
IFS director Paul Johnson said: “The chancellor says he wants to get the public finances on a sustainable basis. It looks to us like that’s going to mean tens of billions of pounds of spending cuts in order to achieve that.
“It’s hard to see what other way out the chancellor has.”
Mr Johnson said the country was not going into a period “with much fat to trim”.
“One of the problems the government faces is we have had a decade and more of really tight spending settlements, we’re still spending less on a lot of public services than we were just over a decade ago,” he told BBC News.
Cutting public sector pay, benefits, education, justice and prisons would all be very difficult against that backdrop, he said.
‘Huge uncertainty’
The government’s current commitment is to have debt falling relative to the size of the economy after three years, though that rule predates the start of Liz Truss’s government.
The IFS has done its calculations based on allowing five years before debt must start to fall.
It said it accepted there was “huge uncertainty” over the impact of budgetary policies, and welcomed the government’s focus on faster growth, which it said “would definitely help”.
The chancellor has said he is targeting growth of 2.5% a year, which would boost tax revenues and reduce the need for spending cuts.
However, an independent assessment from the OBR remained vital, the IFS said, to make sure that “politically motivated wishful thinking is not incorporated into economic and fiscal forecasts”.
Forecasts from the bank Citi, which collaborated on the IFS Green Budget, suggest the economy will shrink in the next two years, as rising interest rates and rising prices slow the economy down.
Citi estimates growth will average about 0.8% over the next five years.
Paul Johnson said he would be “very surprised” if he OBR didn’t also suggest that large spending cuts or tax rises would be necessary balance the books.
A Treasury spokesperson said: “Through tax cuts and ambitious supply-side reforms, our Growth Plan will drive sustainable long-term growth, which will lead to higher wages, greater opportunities and sustainable funding for public services.”
“The government is committed to fiscal responsibility and getting debt falling as a share of GDP in the medium term,” they added.
The prospective new owner of Royal Mail has said he will not walk away from the requirement to deliver letters throughout the UK six days a week, as long as he is running the service.
“As long as I’m alive, I completely exclude this,” Czech billionaire Daniel Kretinsky told the BBC.
Mr Kretinsky has had a £3.6bn offer for Royal Mail accepted by its board.
Shareholders are expected to approve the deal in the coming months, but the government also has a say over whether it goes ahead.
Currently the Universal Service Obligation (USO) requires Royal Mail to deliver letters six days a week throughout the country for the same price. But questions have been raised over whether the service could be reduced in the future.
In an exclusive interview with the BBC, Mr Kretinsky also said he would be willing to share profits with employees, if given the go-ahead to buy the group.
However, he appeared to reject the idea of employees having a stake in Royal Mail, which unions have called for in exchange for their support.
The Royal Mail board agreed a £3.6bn takeover offer from Mr Kretinsky in May for the 500-year-old organisation, which employs more than 150,000 people. Including assumed debts, the offer is worth £5bn.
But because Royal Mail is a nationally important company, the government has the power to scrutinise and potentially block the deal.
As well as keeping the new government on side, Mr Kretinsky also faces the task of convincing postal unions that the proposed deal will benefit employees.
The USO is a potential sticking point for both the government and unions.
Royal Mail is required by law to deliver letters six days a week and parcels five days a week to every address in the UK for a fixed price.
How well this has actually been working in practice is a different matter. Ten years ago, 92% of first class post arrived on time. By the end of last year it was down to 74%, according to the regulator Ofcom.
Last year the regulator fined Royal Mail £5.6m for failing to meet its delivery targets.
Royal Mail has been pushing for this obligation to be watered down. It wants to cut second class letter deliveries to every other weekday, saying this will save £300m, and lead to “fewer than 1,000” voluntary redundancies.
‘Unconditional commitment’
Mr Kretinsky has committed in writing to honouring the USO, but only for five years.
And after that, in theory, the new owners could just walk away from it.
However, Mr Kretinsky told the BBC: “As long as I’m alive, I completely exclude this, and I’m sure that anybody that would be my successor would absolutely understand this.
“I say this as an absolutely clear, unconditional commitment: Royal Mail is going to be the provider of Universal Service Obligation in the UK, I would say forever, as long as the service is going to be needed, and as long as we are going to be around.”
Mr Kretinsky added that the written five-year commitment was “the longest commitment that has ever been offered in a situation like this”.
Another potential stumbling block for the deal, however, is how the company will be structured.
Unions would like to see the company renationalised, but Dave Ward, general secretary of the Communication Workers Union (CWU), told the BBC that would be “difficult in the current political and economic environment”.
Instead, what the CWU is pushing for is “a different model of ownership” – that is, where the employees part-own the business.
To get its support for the takeover, the union wants employees to share ownership of the company, along with other concessions including board representation for workers.
It says profit sharing is “not going to be enough to deliver our support and the support of the workforce”.
If the union doesn’t get what it wants, it won’t rule out industrial action, Mr Ward said. Its members went on strike in 2022 and 2023.
Although Mr Kretinsky said he is “very open” to profit sharing, he is not in favour of shared ownership.
“I don’t think the ownership stake is the right model,” he said. “The logic is: share of profit, yes, [but an] ownership structure creates a lot of complexity.
“For instance, what happens if the employee leaves? He has shares, he is leaving, he is not working for the company, he [still] needs remunerating.”
Mr Kretinsky said he didn’t want to create “some anonymous structure” but instead “remunerate the people who are working for the company, and creating value for the company”.
The union is also concerned about job losses and changes to the terms and conditions of postal workers’ contracts.
Mr Kretinsky has guaranteed no compulsory redundancies or changes in terms and conditions but only until 2025.
“If we are more successful, and we have more parcels to be delivered, we need not less people, but we need more people,” he said. “So really, job cuts are not part of our plan at all.”
He said if the management, union and employees work together, “we will be successful”.
Another concern is the potential break-up of the business.
The profit for Royal Mail’s parent company last year was entirely generated by its German and Canadian logistics and parcels business, GLS. Royal Mail itself made a loss.
Mr Kretinsky has promised not to split off GLS or load the parent company with excessive debt, although borrowings will rise if the deal goes through.
But he has a way to go to convince the CWU.
“I can’t think of any other country in the world that would just just hand over its entire postal service to an overseas equity investor,” Mr Ward of the CWU said.
However, Mr Kretinsky said that the postal unions “do understand that we are on the same ship, and that we need this ship to be successful, and that if we are there, we don’t have any real problems to deal with, because the sky is blue, and it’s blue for everybody.”
The union cannot stop this deal but the government can block it under the National Security and Investment Act.
Business Secretary Jonathan Reynolds has said he will scrutinise the assurances and guarantees given and called on Mr Kretinsky to work constructively with the unions.
Mr Kretinsky may say that he and the unions are ultimately on the same ship but, as things stand, they are not on the same page.
Who is Daniel Kretinsky?
Daniel Kretinsky started his career as a lawyer in his hometown of Brno, before moving to Prague.
He then made serious money in Central and Eastern European energy interests.
This includes Eustream, which transports Russian gas via pipelines that run through Ukraine, the Czech Republic and Slovakia.
He then diversified into other investments, including an almost 10% stake in UK supermarket chain Sainsbury’s and a 27% share in Premier League club West Ham United.
The Czech businessman is worth about £6bn, according to reports.
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