|Date:||30 October 2017|
|Authors:||Carl Emmerson and Thomas Pope|
New analysis by researchers at the Institute for Fiscal Studies (IFS) provides a comprehensive assessment of the UK's public finances and the options available to the Chancellor in his November Budget. It shows that he faces a defining choice: maintain his commitment to a public finance surplus or respond to growing demands for increased public spending.
The government is committed to getting the public finances into surplus by the mid 2020s. If Mr Hammond takes this commitment seriously then a likely significant deterioration in the public finance forecasts means that he will have little space for Budget giveaways. Yet the pressures to spend more are becoming increasingly intense while the parliamentary arithmetic makes tax increases look very difficult. It is hard to see how the Chancellor can both maintain the credibility of his fiscal targets and respond effectively to the growing demands for spending.
A worsened public finance outlook is likely because the Office for Budget Responsibility (OBR) has indicated that it is likely to downgrade its forecast for productivity growth. Downgrading just halfway towards the terrible productivity growth seen over the last seven years could put the deficit on course to be almost £20 billion higher in 2021–22, at around £36 billion, than the £17 billion that was forecast by the OBR in March. In addition, lack of clarity over the nature and impact of our withdrawal from the European Union means that the uncertainty around these forecasts is unusually large.
These are among the main conclusions of a new report by IFS researchers, Autumn 2017 Budget: options for easing the squeeze, published today and funded by the Institute of Chartered Accountants in England and Wales (ICAEW) and the Economic and Social Research Council (ESRC).
In terms of the outlook for the public finances, the report finds that:
But any substantial downgrade to productivity forecasts would easily dwarf the other factors affecting borrowing. In the March Budget, the OBR assumed productivity would grow by 1.6% a year, still below the over 2% a year achieved over the 40 years leading up to the financial crisis. But over the last seven years productivity has grown at just 0.4% a year. The public finances forecasts for the next five years are hugely sensitive to the productivity assumptions the OBR chooses to make.
Current plans imply considerably additional ‘austerity’ over the next few years. Total public spending is due to fall by 1.7% of national income while real day-to-day spending per capita by central government departments was forecast to fall in real terms by almost 5% (£15 billion in aggregate) between this year and 2021–22. This would come on top of falls of 13% (£46 billion) since 2010–11. £12 billion of cuts in benefits for working-age families are still in the pipeline, on top of £29 billion implemented since 2010–11.
With respect to some specific policy options:
Thomas Pope, a research economist at IFS and an author of the report, said: “The first Budget of a new parliament is often the best chance a Chancellor has to set out his stall. Mr Hammond, though, has been dealt a very tricky hand indeed. The political arithmetic makes any significant tax increase look very hard to deliver. It looks like he will face a substantial deterioration in the projected state of the public finances: were the OBR to downgrade productivity growth halfway towards the terrible experience of the last seven years, this could add £20 billion to borrowing five years out. And, in the known unknowns surrounding both the shape and impact of Brexit, he faces even greater than usual levels of economic uncertainty.”
Carl Emmerson, Deputy Director at IFS and the other author of the report, said: “Public sector workers, the NHS, the prison service, schools and working-age benefit recipients, among others, would like more money. Even if Mr Hammond does find some, unless it did represent a very big change of direction, it won’t mean ‘the end of austerity’. Tight spending settlements, net tax rises and cuts to working-age benefits are all putting significant downward pressure on borrowing over the next two years in particular. Given all the current pressures and uncertainties – and the policy action that these might require – it is perhaps time to admit that a firm commitment to running a budget surplus from the mid 2020s onwards is no longer sensible.”
Notes to editors