© Reuters. FILE PHOTO: New Chancellor of the Exchequer Jeremy Hunt leaves 10 Downing Street in London, Britain, October 14, 2022. REUTERS/Henry Nicholls
LONDON (Reuters) – Britain’s latest finance minister Jeremy Hunt needs to raise an estimated 40 billion pounds ($45 billion) to repair public finances.
He is due to provide more details of possible spending cuts and tax changes, beyond those announced this week, in a medium-term fiscal plan on Oct. 31.
Here are some of the areas which could be affected.
PENSIONS, WELFARE PAYMENTS
There is speculation that the state pension and welfare payments could be linked to average earnings rather than inflation which is currently running at more than 10%.
For pensions, such a move would save the government 6 billion pounds ($6.74 billion) in each of the next two financial years, according to the Resolution Foundation, a think-tank, while for working-age benefits the change would amount to savings of 7 billion pounds in 2023-24, the Institute for Fiscal Studies has estimated.
Prime Minister Liz Truss on Oct. 19 pledged to stick with the “triple lock” mechanism the government uses for increases in public pensions which means they go up by the highest of earnings, inflation or 2.5%. Hunt gave no such commitment when he was asked two days earlier.
On benefits, both have said they want to help the most vulnerable.
Hunt is considering extracting more tax from Britain’s banking industry, according to a report in the Financial Times.
Banks are expected to post bumper profits in the short term, presenting Hunt with a window to keep an 8% surcharge on profits and scrap the previous government’s plan to cut it to 3%.
OIL AND GAS COMPANIES
North Sea oil and gas companies could be in the firing line if Hunt decides to extend a windfall tax on producers. Lawmakers in July approved a 25% windfall tax which is due to end in 2025.
A delay to implementing a planned cap on old age care costs is also on the table, a move which could save about 1 billion pounds a year, according to government estimates.
The Bank of England’s policy of paying interest to banks on the reserves they hold with the central bank could be reviewed.
British banks hold around 947 billion pounds of reserves at the BoE, largely as a result of quantitative easing that the central bank is yet to reverse. A former BoE deputy governor has suggested switching to a tiered system of reserves remuneration from the current system of paying interest, a change he says could save the government between 30 and 45 billion pounds a year.
BoE Governor Andrew Bailey has said the current system is needed to transmit interest rate changes through the economy.
Truss has pledged to increase defence spending to 3% of GDP by 2030. Her spokesperson reiterated the commitment on Oct. 18 but noted the route to reaching that level has not been set out.
“The structure obviously of how we get to that 3% increase over a number of years will be determined in conjunction with the Ministry of Defence and the Treasury (finance ministry),” the spokesperson said.
Infrastructure such as new roads, railways, hospitals and other projects are due to cost the government 100 billion pounds a year until 2026, according to The Times.
It said an 11 billion pound project to build new affordable homes between 2021-2026 could be scaled back.
Other high-profile projects, such as parts of the new HS2 high-speed railway, could be at risk. The first stage of HS2 between London and Birmingham is already being built but construction of the second phase to Manchester via Crewe has not started. A link to Leeds was scrapped in 2021.
Cost estimates for completing HS2 soared to 100 billion pounds before the Leeds link was removed.
Spending on foreign aid could stay at 0.5% of economic output instead of rising back, as planned, to its previous level of 0.7% in the 2024/25 financial year. The change represented a saving of 3.5 billion pounds in its first year in 2021.
Asked on Oct. 19 about the foreign aid budget, Truss said more details would be set out in due course.