Devon county council leader John Hart dreads the return of austerity. A Conservative who has long complained about Whitehall’s tenuous grasp on regional issues, Hart must find savings of £27m next year before Jeremy Hunt has even begun looking for further cuts in local authority funding. England’s counties, most of them Tory run, face a £500m shortfall next year, according to the Local Government Chronicle. The big cities and unitary authorities are also on course for huge deficits and worse when the chancellor slashes their budget allocations for the 2023-24 financial year and beyond. Jeremy Hunt and Rishi Sunak are under pressure from all sides to limit spending cuts after 10 years of austerity and the Covid-19 pandemic left much of central and local government gasping for air. Early in his tenure at No 11, Hunt called for efficiency savings to repair the damage caused by Liz Truss and Kwasi Kwarteng’s mini-budget fiasco without spelling out how he planned to achieve them. Hart made it clear to fellow councillors at a recent meeting that he could not conceive where further cuts might fall. “When I heard a minister saying in the last few days that local government has got to take some more pain because it still has fat on it, my comment was: I’ve got bone left and we’ve already been chipping into some of that over the last year or two,” he said. Whitehall departments are in a similar position. Traditional Tory targets like justice and transport complain that every possible saving has been made in the last decade. Lacking options to cut spending without sparking a Tory revolt, Hunt and Sunak are likely to rely heavily on higher taxes to recoup much of the expected £40bn to £50bn extra shortfall in next year’s budget. There will be stealth taxes, like the ones already planned by Sunak when he was chancellor – most notably the inflation-linked increase in tax thresholds year-on-year that will pull millions of people into higher tax brackets, generating billions for the exchequer. Council tax, called Britain’s most unfair tax by many and kept out of the spotlight during the pandemic, could again become a major source of income. Briefings from No 10 have signalled that there will be 50-50 split between tax rises and spending cuts. The money is needed because while Truss’s tax-cutting bonanza has largely been scrapped to reduce next year’s budget shortfall, the legacy of her misguided approach, coupled with a deteriorating outlook for economic growth and a financial market panic that damaged overseas investor confidence, mean that to bring down debt, more needs to be done. Sunak can say the cost of government borrowing has stabilised and the pound has mounted a modest recovery, but both are only back to pre-Truss levels and financial markets remain on high alert. Bank of England officials, concerned about an inflation rate that hit 10.1% in September, are also on the warpath. This week the bank’s monetary policy committee is predicted to raise its base interest rate by 0.75 percentage points to 3%. City traders expect the figure to hit 5% next year. Higher credit costs are going to add further pain to all those who have extended their borrowing in the last 10 years, and not just those people refinancing their mortgages.
Government is also facing higher borrowing costs. In September public borrowing jumped in response to a £7.7bn debt interest bill, £2.5bn higher than the same month last year. In a further twist of the financial knife, the benefits of the Bank’s quantitative easing programme of buying government debt are about to reverse. Last year the Treasury benefited from low interest rates on its borrowing and the profits from QE. One of the Bank’s former deputy governors, Paul Tucker, has estimated that the Treasury will be £40bn worse off from QE losses in addition to the higher interest to be paid on new debt, and argued that the government should override the usual rules to prevent this from happening.
Intervening to limit the QE bill is known to be under consideration by Hunt given the amount of money at stake, but such a move goes under the heading of damage limitation. The Office for Budget Responsibility, which will produce forecasts for economic growth and the public finances at the budget on 17 November, may report some good news. A dramatic drop in gas prices this month will give it room to predict lower inflation and interest rates over the next five years, taking some of the pressure off Hunt. The bad news for the Tory party faithful like Hart and everyone else is that Hunt will still need to raise taxes, even if he can avoid harmful spending cuts.