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So where is all this money coming from, Boris?

Newspaper article

There has been no Election, no change of party in government, and yet the rhetoric of the past few weeks suggests a complete about-turn in economic policy.

After nine years of austerity, which has seen a record- breaking deficit brought under control through record-breaking spending cuts, all we hear now is ‘spend, spend, spend’.

Last week, new Chancellor Sajid Javid joined in, promising another £2 billion to ‘turbocharge’ No Deal preparations.

Remember, this is £2 billion on top of £4 billion already allocated by the last Chancellor for Brexit preparations. So, £6 billion and counting, just to tide us through the immediate costs of leaving the EU. That is a significant sum.

We will have to wait until this autumn’s Budget and spending review to discover whether the reality of Government policy matches the words, but it would be a big surprise if we didn’t see some serious spending increases.

Even in normal circumstances, austerity would be ending about now. The deficit is historically low – a real achievement given the scale of public borrowing back in 2010. Had Mrs May got her deal through Parliament, and were Philip Hammond still Chancellor, I think we’d be seeing quite significant spending increases.

The pressure on public pay, social care, jails, the justice system and local government is evident. Mr Hammond might have found £15 billion or even £20 billion on top of the billions already allocated to the NHS to deal with these pressures.

These sums would have meant a bit more borrowing but, crucially, would have avoided the level of public debt getting bigger as a share of national income.

There is a spanner in the works, however. The Bank of England has just downgraded its forecasts for economic growth, even assuming a Brexit deal is reached.

Economies around the world are slowing down, and our political situation is having a damaging effect on business investment. If the Bank is right, there will be less money to splash around.

The real problem for Messrs Johnson and Javid, though, is that they don’t know what sort of Brexit we are going to get – and that really matters when it comes to the national finances.

If we leave the EU without a deal, the economy will suffer. The medium term impact is clear: disrupting business with your richest and most important trading partner will reduce national income by tens of billions.

But what our economy will look like in a month, a year after leaving with No Deal is anyone’s guess.

So, what to do? Well, preparing for such an eventuality seems to make sense, if you think it is a real possibility. The scale of preparation suggests the chances are rather greater than the million-to-one against suggested by Mr Johnson. Who spends billions to insure against a one-in-a-million chance?

The Government implies that opening the spending taps will allow us to weather the No Deal storm. This is possible – but only if the spending is carefully directed to where the economy needs it. Spraying it around could actually be rather risky.

If the effect of No Deal is to create a series of logjams in the economy – at the borders, for example – and to increase prices as the pound falls, then boosting Government spending might either push prices higher still or prompt the Bank to raise interest rates.

If I were Chancellor, I would make no firm decisions on tax and spending until I knew what form Brexit was going to take.

And, if we do start opening the fiscal taps as a result of a No Deal Brexit, we’ll have to close them tight again later. We really should be consigning austerity to history, but we are in danger of talking our way into another dose of it.

Paul Johnson is director of the Institute for Fiscal Studies. Follow him on @PJTheEconomist

This article was first published in The Mail On Sunday and is reproduced here with permission.

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Press release
Boris Johnson’s two main tax proposals – to increase the income tax higher rate threshold (HRT) from £50,000 to £80,000, and to raise the point at which people start paying National Insurance contributions (NICs) will "cost many billions of pounds", say IFS researchers.