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A recession is on the horizon and the chancellor “is in a terrible bind” as low growth and high-interest payments on debt mean little room for manoeuvre, according to a respected think tank.

The UK economy is stuck between the possibility of low growth and persistently high inflation, the Institute for Fiscal Studies (IFS) said in its green budget report.

As a result, there is no capacity to cut taxes or increase spending, it said.

Policy makers risk recession if unfunded tax cuts are introduced, as they could cause more inflation and lead the Bank of England to bring borrowing costs up by hiking interest rates or keeping them higher for longer.

Interest rates were brought to 5.25% after 14 consecutive rises in an effort to tame the rate of price rises.

Heightened borrowing costs and lower company profits have led bank Citi (who produced economic forecasting for the report) to expect a “moderate recession” through the first half of next year.

A recession is two back-to-back three-month periods where there is a negative amount of economic growth.

At the same time the government is set to have the largest budget surplus “in a generation” as the amount of tax coming into state coffers will be greater than government outgoings.

State borrowing will be £20bn less than predicted by the independent official forecasters, the Office of Budget Responsibility (OBR).

Rising wages mean more tax is being taken in. Previous analysis from the IFS said the UK’s tax burden is the largest since the Second World War.

Despite overall borrowing estimated to be lower than first thought, the amount of money in interest payments on public debt will grow, the report said.

Echoing statements made by Jeremy Hunt to Sky News last week, the report said £30bn more in interest payments could be paid this year than expected.

Pressure will mount on the government to increase public spending more than current plans but from March 2025 there are likely to be effective cuts in the budgets of government departments and falling spending on public services, the report added.

The publication comes ahead of the chancellor’s autumn statement on 22 November.

The rate of price rises in the UK has remained high with the consumer price index (CPI) measure of inflation at 6.7% in August, more than triple the goal of the UK central bank, the Bank of England.

It’s not just the chancellor who faces pressure. Prime Minister Rishi Sunak has staked some of his political success on a growing economy by making it one of his five priorities.

Latest figures show the rate of economic growth – gross domestic product (GDP) – was 0.2% in August this year after a contraction of 0.5% in July.

“Contrary to previous reporting, the UK’s growth projections have recently been dramatically upgraded with the IMF confirming that the UK will grow faster than Germany, France and Italy in the long term, as well as being the fastest major European economy to recover from the pandemic,” a spokesperson for the Treasury said.

“We must stick to our plan that we are delivering to halve inflation, which will help unlock sustainable growth, support families with the cost of living and get debt falling.”

In response, the Labour shadow chief secretary, Darren Jones said: “Successive failures by Conservatives ministers have left us with low growth, high tax and national debt at the highest level in generations. Britain cannot afford another five more years of the Conservatives.”

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What’s behind Starmer’s reset?

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What's behind Starmer's reset?

👉Listen to Politics At Sam And Anne’s on your podcast app👈       

As MPs return to Westminster for a packed autumn term, will the prime minister be back with a bang?

Sky News’ Sam Coates and Politico’s Anne McElvoy discuss Keir Starmer’s priorities as the so-called “reset week” begins.

There’s chatter around No 10 of a staffing restructure but could this impact the government’s message and delivery of its missions?

Back in the Commons, the home secretary will lay out the government’s plans to restrict family members from joining asylum seekers.

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What to expect with US crypto policy as Congress comes back in session

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What to expect with US crypto policy as Congress comes back in session

What to expect with US crypto policy as Congress comes back in session

According to some Republican lawmakers, the first crypto-related priority in the Senate will be to pass legislation for market structure.

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Sir Keir Starmer’s ‘Mr Fixit’ is likely to be a recipe for conflict

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Sir Keir Starmer's 'Mr Fixit' is likely to be a recipe for conflict

After a torrid time before the summer break, Sir Keir Starmer has reshuffled his inner circle again on the first day back. 

This has become something of a habit.

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Although none of the Number 10 team are household names or public figures, the tally of those cycling through the top jobs is worth noting.

As of now, he’s had four chiefs of staff – the incumbent returning to the job, two cabinet secretaries with a third rumoured to be on the way and five directors of communications – a job that routinely fails to last a year these days.

The lesson this tells us is that when there’s blame to go around, Sir Keir is happy to apportion it to his closest aides.

In an interview today, the prime minister was clear that these changes are about moving to a new phase of government, more focused on delivery.

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A delivery phase implies legislation completed and a focus on implementation. Bluntly, this is not the case or an accurate assessment of the job that now needs to be done.

The autumn term is not about implementation.

It’s about filling the £20bn to £40bn black hole we expect to emerge in the autumn budget, as well as continuing to deal with an uncertain world globally, and deciding on massively tricky domestic issues like reform of special educational needs and whether to revisit welfare reform.

We are still at the “big choices” section of this parliament, not the delivery phase.

The big choice in Sir Keir’s reset on Monday has been to bring in his own Mr Fixit into Downing Street.

He chose a mid-level cabinet minister, Darren Jones – until today the number two in the Treasury – and has parachuted him into his office to oversee policy.

This is an appointment, I’m told, that was pushed and encouraged by Rachel Reeves because of Mr Jones’ role in the spending review.

As chief secretary, Mr Jones is meant to have gone item by item through every department’s budget. He knows where the financial bodies are buried and will be a major alternate source of advice for Sir Keir to individual cabinet ministers.

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This is undoubtedly a recipe for conflict. There are already some around the cabinet table who found Mr Jones’ style a touch brusque. His fans say this is part of why he is effective: he is prepared to challenge what he’s told, is an independent thinker and unafraid to challenge big beasts.

He will now play this role permanently, on behalf of the prime minister, and structurally, this means he is bound to be disliked by several of these colleagues who will no doubt, in time, seek to undermine him, just as he will challenge them and have the last word with Sir Keir.

No matter that some might be surprised at the choice, as a fiscal and reforming hawk, since few would put him on the same ideological wing of the party as the prime minister. He is also a late joiner to the Starmer project, although joining in opposition spent years longer than some as chair of the business select committee rather than taking more junior roles.

This is now immaterial. He is responsible for making Sir Keir’s government work in practice. His colleagues could do worse than to sincerely wish him good luck and leave him to it, as there is a great deal to be done.

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