Defence spending needs to be squeezed, Jeremy Hunt will warn new PM

Defence spending needs to be squeezed to help balance the books, Jeremy Hunt will warn new prime minister

  • The Chancellor will tell new prime minister defence spending must be squeezed
  • Jeremy Hunt needs to find a way to close £40billion black hole in public finances
  • Ben Wallace has hinted he would resign without 2.5 per cent rise for defence

Jeremy Hunt is to warn Britain’s new prime minister that they need to squeeze defence spending and axe the prison-building programme within days to help balance the books.

‘Eye-watering’ measures designed to close a £40billion black hole in the public finances are being considered.

The Chancellor is expected to finalise the package of tax rises and spending cuts this weekend, ahead of a planned Budget statement on October 31.

The cuts will effectively be presented as a ‘take it or leave it’ package for the new PM, who will have just hours to decide whether to press ahead, or risk further turmoil in the financial markets by postponing the Halloween statement.

Among the measures, Mr Hunt is expected to ditch a pledge to raise defence spending to 2.5 per cent by 2025.

It is likely to bring him into conflict with Defence Secretary Ben Wallace, who has signalled that anything less would be a resigning matter. 

Jeremy Hunt will warn the new prime minister that defence spending must be squeezed in order to close a £40billion black hole in the public finances – a move likely to anger Defence Secretary Ben Wallace

Jeremy Huny has introduced £32billion of taxes but needs to make cuts to close a £40billion black hole in the public spending

UK borrowed record £20bn last month 

The financial headache facing Britain’s next prime minister was underlined yesterday by figures on the state of the public purse.

The UK borrowed £20billion in September – £2.2billion more than the same month last year and the highest September on record, apart from during the pandemic in 2020. Separate figures from the Office for National Statistics (ONS) also showed shoppers were far less willing to splash the cash. Retail sales slid 1.4 per cent between August and September, far more than the 0.5 per cent expected. Part of this was due to the Bank Holiday for the Queen’s funeral, which saw many shops close.

But economists said higher prices were also weighing heavily on spending. Danni Hewson, of investment platform AJ Bell, said: ‘After Covid we were asked to spend our way out of recession. That’s simply not an option now.’

Mr Hunt has already announced an extra £32billion of taxes, reversing most of the tax cuts unveiled in Kwasi Kwarteng’s emergency Budget last month. He has also reduced Liz Truss’s two-year energy price ‘guarantee’ to just six months.

But he has warned the Cabinet that another £40billion must be found in order to convince the markets the Government can reduce debt over the next five years.

Miss Truss vetoed a proposal to give pensioners a real-terms cut following a Tory backlash. And a string of MPs have warned they will block any move to increase benefit payments by less than inflation.

Mr Hunt is said to have concluded that a £4billion plan to increase prison places – including building six new jails – can no longer be afforded in full.

A Treasury source said Mr Hunt was still committed to raising the defence budget to 3 per cent of GDP by 2030. But they acknowledged that the extra cash was now likely to be ‘back-ended towards the end of the decade’ – a move that will be fiercely resisted by Mr Wallace, who has warned that new forces take time to generate and cannot be turned on like a switch.

Another Whitehall source said the choices needed to balance the books were so stark that they would make it impossible for Boris Johnson to continue his previous free-spending approach.

The source said: ‘The situation is dire. Even after the tax reverses, the gap left is £35-40billion – and that will be the same whoever becomes PM. With Boris, in particular, I don’t know how he could square the circle – the kind of cuts needed are completely anathema to him. Rishi would probably find it easier to take the decisions that are needed.

Rishi Sunak, who currently has the most backers to become the next Prime Minister, would need accept the cuts almost immediately or face further market turmoil

‘The truth is that all the options are either impossible or terrible. You can’t cut the NHS, you can’t cut benefits, you can’t cut the capital budget for schools – and we have the highest tax burden for 70 years.

‘And so Jeremy is having to look at defence, he’s having to look at prisons, he’s having to look at everything. It is very tough.’

The Treasury said Mr Hunt was continuing to work on the basis that the Budget statement will be delivered on October 31. Miss Truss is still being ‘updated’ but is no longer thought to be directly involved in decisions.

A source said: ‘The Chancellor is committed to October 31 as it is timed specifically to be ahead of the Bank of England decision on interest rates later that week. It will ultimately be for the new PM to decide whether to delay or proceed. But these are decisions that are necessary for fiscal stability.’

Mr Hunt’s decision to reverse ‘almost all’ of the tax cuts in last month’s emergency Budget succeeded in calming the financial markets and reducing the cost of government borrowing.

But Whitehall sources fear that market jitters could return swiftly if the Budget statement is significantly delayed or watered down.

Mr Hunt is expected to announce a new fiscal rule that will require the Government to start lowering debt as a proportion of GDP within five years. But he is also looking for short-term savings in order to reduce borrowing levels now and cut the cost of servicing the UK’s towering debt mountain in future.

The Chancellor warned the Cabinet this week that ‘all’ government departments would have to find efficiency savings.

The in-tray of agonies facing the winner 

The in-tray awaiting the next PM is loaded with problems – and whoever takes on the daunting task must do so while piecing together a bitterly divided party. Here CHRIS BROOKE looks at the challenges ahead.

TAX AND SPEND

After racking up a £400billion bill during the pandemic and with rising interest rates sending borrowing costs even higher, the Government faces the nightmare task of trying to balance its books.

How can the Tories raise sufficient tax revenue and control spending while boosting growth in the economy to show there is a road out of the debt quagmire the nation’s finances appear stuck in?

ENERGY

With warnings of winter blackouts, simply keeping the lights on will be an achievement. Even with government help, millions will struggle to pay their energy bills – and with the prospect of prices going even higher in April, the PM must work out what support to give when the energy price guarantee ends in spring. Energy costs are also putting a massive strain on businesses.

NHS

The health service appears stuck in a never-ending crisis.

There are seven million people on waiting lists, constant difficulties seeing a GP, problems with ambulance response times and a crisis in maternity care. Many more doctors and nurses are needed and many believe major reform of the NHS is the only solution. But with two years until the next election there is no time to implement major structural change.

UKRAINE

With Vladimir Putin increasingly cornered, fears are growing that there could be a nuclear escalation in the Ukraine war. Helping Ukraine to victory requires ever-increasing support from the UK and its Nato allies at no little cost.

IMMIGRATION

The Tory faithful have long demanded a clampdown on the flood of cross-Channel illegal immigrants but so far no solution has been found and the Rwanda removals scheme remains stuck in the courts.

At the same time, some sectors of the economy want more immigrants to stimulate growth, meaning the new PM faces another difficult balancing act.

BREXIT & NORTHERN IRELAND

Brexit might be done but making it work remains a big problem. Talks to find a compromise solution to the Northern Ireland protocol – designed to prevent a trade border with the Irish Republic by effectively keeping the Province in the EU’s single market for goods – are at a delicate stage. A decision on whether to trigger Article 16 emergency measures that could start an EU trade war may need to be made.

POLLS AND PARTY UNITY

With the Tories trailing up to 39 points behind Labour in the polls, the new PM will be anxious to avoid being forced into an early General Election.

That means the next premier must somehow hold together a party that is split apart by factions. Conservative unity has been an impossible goal since the Brexit referendum but must somehow be achieved to avoid an election wipeout in two years’ time. 

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