Mind the (credibility) gap

Sunak faces a gloomier economic outlook as the new PM than he left as Chancellor:

• GDP set to be 2-4% weaker by end-2024 with OBR likely to forecast a recession
• Unemployment expected to rise by 500k, peaking above pandemic levels
• The weaker outlook increases borrowing by over £20bn

Despite U-turns, the mini-budget’s legacy is higher borrowing:

• £17bn of tax cuts remain and the costs of energy support remain large and uncertain
• Interest rates are rising around the world (increase since mini-budget costs HMT around £10bn)
• Relative rise in UK borrowing costs since mini-budget has unwound but the increase over the summer has not and costs around a further £10bn
• Government will need to reduce borrowing by at least £40bn to hit likely fiscal rules with minimal headroom

The menu of spending cuts and tax rises is long, if unappetising:

• Around £10bn in easy-to-announce but bad-for-growth investment cuts likely
• More than £20bn in day-to-day spending cuts beyond the current spending review would usher in a new period of austerity given around £20bn in real-terms cuts in the coming years
• Cuts to working-age benefits and pensions would save around £9bn but would be disastrous in the context of the cost of living crisis
• So further tax rises, not just spending cuts, should be expected