Economists question black hole in UK finances

A group of economists has questioned UK assertions that a “black hole” in the public finances will need to be filled with austerity measures and tax rises.

The Progressive Economy Forum, which campaigns to end austerity, said the £50bn “hole” disappears entirely if the debts are calculated differently.

The government previously used a different measure of debt, returning to that would leave £14bn spare, they say.

But experts disputed the findings, saying they would put the UK at risk.

The Treasury said the public finances would be assessed independently by the Office for Budgetary Responsibility (OBR).

Media discussion of the government’s tax and spending options ahead of the Autumn Statement has been dominated by talk of “black hole” in the public finances, put at anything from £35bn to £60bn, which, it is assumed, must urgently be “filled” with spending cuts or tax rises.

But the Progressive Economy Forum said that “fiscal hole” is merely the difference between an uncertain forecast – of how much the government will spend and borrow in future under current plans – and what it can afford to do if it is to hit its own targets – that debt starts to fall as a proportion of the economy three or five years from now.

If the economy grows faster or the time frame changes, the “hole” can shrink or grow dramatically, the economists said – far more than it would because of spending cuts or tax rises.

Using official forecasts from the OBR, the authors of the research, economists Jo Michell and Rob Calvert Jump, conclude that small changes in forecasts for future interest rates and growth, and what is counted as government debt, dramatically alter the size of the predicted gap in the public finances.

These changes to forecasts and accountancy rules produce far bigger effects on the £50bn “hole” than any changes in spending and taxes the government is reported to be considering for the Autumn Statement, they added.

For instance, reversing a decision to exclude the Bank of England’s debt from the government’s own debt figure, made in January 2022, “completely wipes out the projected ‘fiscal hole’ and, on the official forecasts, leaves the government with an additional £14bn to spend against its own debt targets by 2027”, they said.

As chancellor, Rishi Sunak previously used a different accountancy rule in 2020 and 2021 to arrive at his chosen figure for government debt.

But changing the accountancy rule used to measure the government debt back to what it was before the Autumn Statement in 2021 completely removes the “black hole”, according to the economists’ analysis, putting government debt back on a sustainable footing.

Conversely, the report says, a small increase in the government’s forecast borrowing costs makes the “hole” much larger and the path of future debt unsustainable, rendering the fiscal target “useless”.

“There is now a consensus among economists that austerity does significant damage to an economy’s potential, undermining growth, as the experience of the last decade in Britain has shown us,” Mr Calvert Jump said.

“Further austerity will do far more damage than a ‘fiscal hole’ that disappears with tweaks to models or accounting rules.”

However, Tim Pitt, a former advisor to chancellors Phillip Hammond and Sajid Javid and a fellow at the centre right think tank Onward, disputed the findings.

He said the “fragile” state of the public finances after the mini-Budget called for “more fiscal conservatism, not less”.

Speaking to the BBC, he warned the new chancellor would “be taking a massive gamble” that could potentially lead to further turmoil on financial markets if he sets out a plan that simply tweaks how debt is treated in terms of accounting, without any sizeable tax rises or spending cuts.

The OBR will publish an assessment of the public finances alongside the Autumn Statement.

A Treasury spokesman said: “We are facing a global crisis; the IMF is warning that one third of the world’s economies will experience a recession this year or next year,” they said.

“During these challenging times our number one priority is economic stability and restoring confidence that the United Kingdom is a country that pays its way.”

Reports /TrainViral/