Thread by @BenChu_

The media is awash with talk of a “fiscal hole” that needs to be filled with tax rises/spending cuts in next week's #AutumnStatement.

But what is this "fiscal hole" & how worried should we be about it?

A thread... 🧵1/

...The first thing to stress is that it’s NOT some kind of hard financial limit on government spending or borrowing, which, if breached, means disastrous things automatically happen...2/

...Rather, it’s a measure of how far off course the government is from meeting its own fiscal rules, the main plank of which has been to have the national debt falling as a share of the overall economy in three years' time, implying the financial year 2025-26...3/

...The @OBR_UK forecast from March showed debt falling as a share of GDP in 2025-26 - so the fiscal rule being met.

But a more RECENT projections from @TheIFS - the red line -shows debt STILL rising in that year - so the fiscal rule broken...4/

...The “fiscal hole” is the extent to which taxes need to be raised or spending cut in that PARTICULAR year for the rule to be MET again

And using these projections it seems to be roughly 2% of GDP, or around £50bn...5/

...There *is* choice involved here.

The government could *choose* a different year in which to target falling debt & the Chancellor *is* expected to push the target out to five years’ time, rather than three years', in the #AutumnStatement next week...6/

...And the Chancellor could also choose a different debt target entirely - perhaps one that carves out debt incurred for infrastructure investment.

Some say he should.

Discussion by @JoMicheII here...7/

https://twitter.com/JoMicheII/status/1590651800105148417?s=20&t=sYn3xLCLx5vFc4cZRfdkHQ

...There’s also uncertainty about the performance of the economy over that time - growth could be stronger, meaning the size of the economy could be bigger, meaning a smaller fiscal hole.

This is something @carsjung of @IPPR has pointed out...8/

https://twitter.com/carsjung/status/1590638533340844032?s=20&t=sYn3xLCLx5vFc4cZRfdkHQ

...And an increasing number of economists argue large near-term spending cuts or tax rises risk HARMING the performance of the economy as it goes into recession, thus proving counterproductive even from the narrow perspective of the public finances...9/

https://twitter.com/BBCNewsnight/status/1586112354559086592?s=20&t=ahnPWVOrQdYXZ0gh0bs9dw

...These are entirely legitimate arguments.

Although the recent market panic when Liz Truss and Kwasi Kwarteng cut taxes permanently without regard to fiscal rules show the dangers of not having *any* mooring for the public finances...10/

...A reminder of what what happened to UK market borrowing costs after that #miniBudget...11/

...and what that has meant for UK remortgagers...12/

...It’s also worth looking at the fiscal situation in other comparable countries.

What’s striking from the IMF’s recent forecasts is that the UK’s annual projected borrowing in 2026 at 1.3% of GDP is smaller than most other G7 countries...13/

....It's a similar story on projected debt levels, with the UK near the bottom of the pack (at least on the IMF's projections/chosen metrics)...14/

...Now, the US might be a special case in terms of its fiscal leeway because of its dominant role in the global financial system.

But Italy and France?

If the UK has a fiscal hole that urgently needs to be filled, surely the same is true of them?...15/

....The eurozone has fiscal rules, which annual borrowing among member states of no more than 3% of GDP and plans to bring down national debt to no more than 60% of GDP.

So it’s pretty clear France and Italy do have substantial implied fiscal holes against this target...16/

...although those eurozne rules have been suspended until 2024 due to the fallout from the invasion of Ukraine *and* the European Commission this week unveiled plans to modify them to make them more flexible...17/
euractiv.com/section/econom…

...So why, then, the scramble from the UK government to fill a fiscal hole that other peer governments seem much more relaxed about?

Well, it all comes back to that market panic of the past month, which, let's remember, saw the UK singled out by international investors...18/

...Some argue that if the Government is to regain the confidence of the financial markets it has to show next week not only a clear plan for filling this fiscal hole...19/

....but to commit to some painful economies in the near term to achieve it & thaht pushing all the cuts/tax rises beyind the next election would not be credible in the eyes of the market and risk another sell-off of UK government debt...20/

...The signals so far are that the PM and Chancellor agree.

But we will find out in next week's #AutumnStatement.

More on this debate on #Newsnight tonight at 1030pm on BBC2 📺

@BBCNewsnight

#Newsnight explainer here 👇

https://twitter.com/BBCNewsnight/status/1591203893261705216?s=20&t=s7pJg6sy2lEmAdxcSE6Frg