A £45 Billion Budget Hole Awaits Next UK Government, Study Finds

(Bloomberg) -- Britain’s next government will need to find at least £45 billion ($56.6 billion) to stabilize the national debt as the economy struggles with weak growth and high interest costs, according to Bloomberg Economics.

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The projection published Wednesday underscores the scale of the challenge facing the winner of the election that Prime Minister Rishi Sunak says is likely to be held later this year.

The ruling Conservative Party has a target to get debt falling in five years and the Labour opposition is pledging to adopt a similar rule if it gains power, as opinion polls project. That will require the new government to raise taxes or relaunch austerity, says Dan Hanson of Bloomberg Economics.

The assessment is far bleaker than the Office for Budget Responsibility’s forecast in the March budget, when Chancellor Jeremy Hunt was judged to be on course to meet his fiscal rules with £8.9 billion to spare.

Hunt has cut personal taxes by £20 billion since last November and insists he would like to go further in one final fiscal event before the election. Under the Bloomberg Economics scenario, which uses growth forecasts similar to the Bank of England, there will no money for any giveaways.

Hunt has promised to deliver tax cuts by boosting the economy’s growth rate to 2.5%-3%. His Labour opposite number, Rachel Reeves, has said her party will inherit the worst set of economic circumstances since the second world war if it wins the election.

Hanson said his forecast reflects “a more downbeat growth outlook” and a marginally higher path for interest rates than the OBR used. Like the BOE, he estimates the UK trend growth rate will be around 1.2% - lower than the OBR’s 1.7%.

The true picture could be worse, Hanson said. The government only hits its target under the OBR forecast by assuming spending cuts for unprotected public services like prisons, courts and local government that have been branded “undeliverable” by economists and think tanks. The plans “probably need to be topped up by about 0.7% of GDP,” Hanson said, equating to another £20 billion.

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