Is there a turnaround in the UK's fiscal outlook? Chancellor paving the way for tax increases, UK debt rising rapidly, pound dropping to a seven-month low.

British Chancellor of the Exchequer Rishi Sunak paved the way for comprehensive tax hikes on Tuesday. She described her second annual budget as making "tough choices" to reduce UK debt while protecting public spending. Just three weeks before the budget announcement, Sunak delivered an unusually frank speech outlining the difficult economic situation she faces, citing high debt, low productivity, and stubborn inflation. During Sunak's speech, UK government bond prices skyrocketed and the 30-year bond yield hit its lowest point since April. However, the gains narrowed as the speech failed to provide specific details of her plans. The pound fell to its lowest level in seven months against the US dollar at 1.3070. She stated that the government is likely to have to make "tough choices" in the budget on November 26, forcing everyone present to contribute to securing employment and the future of priority areas such as health and education. During a press conference, she said, "In making decisions on tax and spending, I will take any necessary steps to protect families from the impact of high inflation and high interest rates... protect our public services from returning to austerity. I understand the desire for simple answers. In recent years, politicians have been obsessed with spending on short-term fixes rather than developing long-term economic plans. They have been irresponsible in the past, and those who continue to seek simple answers are still irresponsible." Sunak refused to directly answer questions about whether she is preparing to increase taxes in the UK, saying she will outline relevant policies in the budget later this month. She stated that the Labour government solidified the economic foundation with the first tax hike budget last year, but the economic situation has since deteriorated. Sunak reiterated that she aims to increase the fiscal buffer needed to achieve fiscal goals. Sunak increased taxes by 40 billion in her first budget, but economists believe she lost the 9.9 billion reserve buffer and consequently failed to achieve the goal of balancing daily spending with tax revenue by 2029. To rebuild this buffer, tax increases are necessary. However, Sunak stated that if her decisions are correct, she will build a "more resilient public finance, giving it enough room to resist global turmoil, enhance business investment confidence, and allow the government to act more freely when necessary." Sunak stated that although she will not implement "austerity policies" by cutting public services like previous Conservative governments, she aims to reduce government debt as the UK currently faces the highest borrowing costs among the G7 countries. She insisted on her fiscal rules, stating that if these rules are broken, markets may push borrowing costs higher. Some have suggested that she should bypass these rules, borrow more money without consequences, but she pointed out that UK government debt is constrained by the fundamental fact of market sell-offs. Henry Cook, Senior European Economist at MUFG Bank in London, stated that the market will view this speech as sending the "right signal." Cook said, "She said the focus of decisions will be on controlling declining inflation - which is a condition for rate cuts - and that the government will steadfastly adhere to fiscal rules, but I believe the devil is in the details. It is worth noting that she also stated the government will focus on reforming the welfare state." Resolution Foundation in the UK: Sunak's fiscal gap is smaller than previously expected Sunak's remarks firmly blame the current state of the UK economy on the previous Conservative government, indicating that the Labour government may break its campaign promise and not increase key taxes - income tax, value-added tax, or national insurance. The Resolution Foundation think tank (whose former head, Torsten Bell, is now Sunak's policy advisor) predicts that Sunak will need to raise 26 billion ($35 billion) in taxes. However, according to Resolution Foundation, the budget gap Sunak needs to fill will be smaller than feared by most private sector forecasters. The foundation stated that since March, the UK's fiscal gap is around 14 billion ($18.4 billion), far below the estimates of most private sector forecasting institutions. Among the 20 economists surveyed by the institution, over half believe the fiscal gap is between 25 billion and 40 billion. In its pre-budget analysis report released on Tuesday, Resolution Foundation urged Sunak to double the fiscal buffer to 20 billion, which would help end the 16 months of uncertainty that has plagued the Labour government since taking office. The report also suggested that Sunak should address inflation by shifting energy taxes from household bills to general taxation and removing the "two-child benefit cap." All these measures together would require an increase of 26 billion in tax revenue. Resolution added that a larger fiscal space will "send a clear signal to the market that she is serious about public finance issues, which in turn should lower medium-term borrowing costs and make future fiscal events less worrying." But with polls showing Labour's support at a historic low, the November 26 budget is the most politically dangerous moment for Sunak. Last October, she vowed not to raise taxes again after announcing a 36 billion tax increase. However, developments since the spring budget have once again erased her meager financial buffer of 9.9 billion, and according to her main fiscal rule, tax revenue must be sufficient to cover daily expenses by the end of this decade. Resolution stated that since March, borrowing costs have risen by 6 billion; the government withdrew a plan to cut 7 billion in welfare due to Labour MP resistance; and it is expected that the Office for Budget Responsibility (OBR) will announce a downgrade in productivity, resulting in a loss of 14 billion. Resolution stated that higher-than-expected wage growth would offset most of the losses resulting from weak productivity prospects. Recent wage data affected by inflation factors make OBR's wage forecasts appear "unduly gloomy." The think tank estimated that aligning it with the Bank of England's forecasts may generate an additional 13 billion in tax revenue for the 2029-30 fiscal year. Resolution stated that OBR is expected to downgrade productivity by 0.3 percentage points, but the calculated loss will be 14 billion instead of the 20 billion estimated by other economists. The UK's Office for National Statistics stated on Monday that public sector productivity fell 3% compared to 2019 by 2024, and by 0.7% in the three months to June compared to the same period last year. During the same period, productivity in the healthcare industry fell by 1.5%. These data show a slight improvement from previous estimates but indicate that the UK public service productivity has only increased by 1% since 1998.