Vow to end austerity incompatible with deficit cut

Theresa May’s pledge to end austerity is incompatible with Philip Hammond’s target of eliminating the UK deficit by the mid-2020s, unless there are big tax rises or much-improved economic growth, according to the Institute for Fiscal Studies.

The chancellor will need to find an extra £19bn a year by 2022-23, relative to current plans, to meet promises of higher spending on health, defence and aid, and avoid cuts to other public service spending, the IFS said in its Green Budget, published on Tuesday.

Even if this minimum were achieved, there would still be social security cuts worth £7bn working their way through the system.

The think-tank has set out the unenviable choices facing Mr Hammond in his Budget on October 29. Even though borrowing this year may be £5bn lower than the Office for Budget Responsibility forecast in spring, any improvement the chancellor is able to announce will not be enough to fund the prime minister’s promises.

IFS budget chart

“Increasing borrowing is clearly the line of least resistance,” said Paul Johnson, the IFS’ director, noting that Conservative chancellors have historically been more likely to announce giveaways when the public finances were better than expected, than to raise taxes when finances were worse than expected.

Even if Mr Hammond sticks to his current target of balancing the government’s books by the mid 2020s, government debt will fall only slowly as a proportion of GDP, because the long-term outlook for growth is so lacklustre.

IFS chart

The government deficit now stands at its lowest level since 2001 but the IFS said that, if borrowing remained at its current level, debt could rise as a share of national income over the longer term, because periodic recessions would hit the public finances.

If Mr Hammond is reluctant to increase borrowing, his Conservative colleagues may be even more reluctant to support the alternative of higher taxes— with the prime minister at the weekend pointedly declining to endorse the chancellor’s assertion that his party’s manifesto tax pledges no longer apply.

The IFS said it would be necessary to raise tax revenues by 1 per cent of national income to cover the £19bn of new spending pledged by the government. One way to do this would be to add one percentage point to all income tax rates, national insurance contribution (NIC) rates and the main rate of VAT.

Another would be to target tax increases on relatively wealthy older people — for example, charging employee NICs on the earnings of those over state pension age, ending the generous treatment of pension pots that are bequeathed, and charging a higher rate of council tax on more expensive properties.

Tax increases on this scale would take the UK tax burden to its highest level since the late 1940s, although it would still be in the middle of the pack by international standards.

“On tax, everything we’ve talked about is in principle,” Mr Johnson acknowledged. “It will be very hard for many reasons for anything substantial to happen in the short term.”


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