UK still faces 40 billion pound budget hole - Resolution Foundation

By David Milliken

LONDON (Reuters) - Britain still faces a 40 billion pound ($46 billion) budget hole that will need to be filled by tax rises as well as spending cuts, despite recent U-turns on measures proposed during Liz Truss's short-lived premiership, a think tank said on Tuesday.

The Resolution Foundation, which focuses on issues facing low- and middle-income households, said new Prime Minister Rishi Sunak and his finance minister Jeremy Hunt faced unappealing choices ahead of a budget statement due on Nov. 17.

"While the recent focus has been on conditions improving post-Trussonomics, the central picture remains one of a weaker growth, higher borrowing costs and expensive tax cuts that have left a fiscal hole of at least 40 billion pounds to fill," the Resolution Foundation's research director, James Smith, said.

Britain's Office for Budget Responsibility last published borrowing forecasts in March, since when the growth outlook has weakened due to surging energy prices, while interest rates have risen in Britain and globally, pushing up borrowing costs.

The Resolution Foundation estimated that tax rises and spending cuts of at least 30 billion pounds would be needed to ensure debt was falling as a share of gross domestic product by the 2026-27 financial year.

Previous finance ministers had also left a minimum of 12 billion pounds of leeway to achieve their budget goals, the think tank added.

Previously the Institute for Fiscal Studies had estimated Britain faced a budget hole of 62 billion pounds in the wake of the tax-cut plan announced by Truss's finance minister, Kwasi Kwarteng, on Sept. 23.

This 'mini-budget' pushed sterling to a record low against the U.S. dollar and forced the Bank of England to intervene in the bond market, prompting Truss to reverse some of the plans and sack Kwarteng - but too late to save her premiership.

The Resolution Foundation said cuts to investment spending often appealed to British governments seeking to save money - but would come at the cost of longer term growth and would raise 10 billion pounds at most.

High inflation meant government departments - which mostly have fixed cash budgets - are already facing 22 billion pounds of real-terms cuts by 2024-25, limiting the scope for further savings and creating pressure for extra spending, it added.

The government is reviewing a previous promise to raise pensions and welfare benefits in line with inflation, which will cost around 9 billion pounds.

Around 17 billion pounds of Truss's tax cuts remain in place, largely the reversal of a 15 billion pound rise in payroll taxes introduced by Sunak when he was finance minister.

"Further austerity for public services is also likely, but there are limits to how big these can credibly be," Smith said. "This reality means that the Autumn Statement is likely to involve tax rises, not just spending cuts."

($1 = 0.8692 pounds)

(Reporting by David Milliken, editing by Andy Bruce)