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This is not the time for tax cuts or spending increases

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It’s remarkable how much can change in six months. In March the UK was heading towards its first Brexit deadline. Borrowing, adjusted for the economic cycle, stood at £29 billion and falling. Philip Hammond, the chancellor at the time, had announced new spending in the Spring Statement, but this left some departments facing real-terms cuts next year – with quite a difference between the spending plans of the Conservative Party and the Labour opposition.

None of this holds true any more. Last month Sajid Javid announced a top-up to plans for day-to-day spending next year, taking the total to £325 billion – almost £12 billion more than his predecessor. And it’s about £27 billion more than the Conservatives were planning in March 2017, before the last general election. This is all to be financed through higher borrowing.

It also puts public spending next year within spitting distance of the figure implied by Labour’s 2017 manifesto. Even if a Labour government had matched the Conservatives’ £34-billion cash settlement for the NHS on top of this, it would be spending only about £10 billion more than Mr Javid plans to.

Setting aside whether announcing more money for every department really signals a government that is serious about prioritising spending, this sort of largesse has consequences for the public finances. Back in March the (cyclically adjusted) deficit for 2020–21 was expected to be £19 billion, comfortably below the 2 per cent of national income ceiling required by the government’s self-imposed fiscal mandate.

A change to student loan accounting last month pushed this up by £14 billion. Mr Javid then chose to spend every penny of what was left in last month’s spending round. But after some more accounting adjustments – and leaving aside the first signs that growth this year is weaker than expected – we expect borrowing to hit £50 billion next year, breaking the fiscal mandate.

This is just a central estimate based on a “smooth and orderly” departure from the EU with a Brexit deal. Leaving without a deal – even with minimal disruption – would push up borrowing to about £100 billion, or 4 per cent of national income. Debt would climb to almost 90 per cent of national income for the first time since the mid-1960s. Any support to the economy to weather a no-deal exit would push up the deficit still further, at least for a few years.

So what’s a chancellor to do? In the long term the only sustainable response to a smaller economy is to spend less on public services or tax more to support them. This is not the time for permanent tax cuts or spending increases.

But it is impossible to say what Mr Javid ought to do in the more immediate future. Too much depends on how Brexit, and the economy, will play out. A fiscal target that would be appropriate in the face of an economically damaging Brexit would be toothless if a brighter outlook came to pass.

In the meantime, rather than committing to a public finance target for the next several years, the chancellor should set a more modest goal — for example not to introduce unfunded giveaways on tax or day-to-day spending. With plenty of other changes on the horizon, this might be one area where there is value in keeping things the same.

Christine Farquharson is a research economist at the Institute for Fiscal Studies and one of the editors of the IFS Green Budget.

This article was first published in The Times and is reproduced here with permission.

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