Genuine ‘end to austerity’ requires minimum of £19bn extra public spending, warns Institute for Fiscal Studies
Such additional spending implies either tax rises or additional borrowing, neither of which will appeal to the chancellor
The chancellor will need to unveil a minimum of £19bn of additional funding for public services by 2022-23 in his upcoming Budget in order to credibly back up the prime minister’s claim that austerity is over, the Institute for Fiscal Studies (IFS) has said.
In her conference speech last month, Theresa May won headlines by promising that “a decade after the financial crash, people need to know that the austerity it led to is over”, considerably raising expectations for Philip Hammond’s 29 October Budget.
But in its “green budget” today, the IFS suggests that a “minimal definition” of ending austerity would be for real-terms government spending on public services (excluding health, defence and international aid) to be kept constant by 2022-23, rather than falling, as implied by the government’s current plans. This could only be done by increasing their resources by £19bn.
Using a tighter definition of ending austerity – which includes reversing £7bn of planned benefit cuts and keeping departmental spending constant as a share of GDP – would imply Mr Hammond needing to find even more – an additional £34bn by 2022-23 relative to current plans.
Such additional spending implies either tax rises – which will be extremely hard to deliver given the government’s lack of a majority – or additional borrowing, which would likely spell the end of the credibility of the chancellor’s pledge to eradicate the deficit entirely by 2025.
Paul Johnson of the IFS said: “Even on a limited definition of what [ending austerity] might mean would imply spending £19bn a year more than currently planned by the end of the parliament. An increase of that size is highly unlikely to be compatible with his desire to get the deficit down towards zero ... This is going to be the toughest of circles to square.”
The chancellor has indicated that he will set out the fiscal envelope for the next official Spending Review period, beginning in 2020-21, in the Budget, but the Treasury has not so far confirmed whether the review will cover one year or three years.
Mr Hammond is likely to be given some help by a downward revision of borrowing for the current 2018-19 fiscal year by the Office for Budget Responsibility.
But he is also constrained in by the government’s recent promise to spend £20bn extra on the NHS by 2023 and also the commitment to keep the defence budget at 2 per cent of GDP.
This is on top of plans to squeeze the budgets of departments such as Justice and the Home Office further in the coming three years.
Mr Hammond has spoken of a potential “Brexit dividend” for the public finances if there is a breakthrough deal with the EU, but the IFS was sceptical of the idea that this would make any substantial difference to the fiscal trade-off facing the chancellor.
“Even ignoring the likely adverse effects of leaving the EU on economic growth and consequently tax revenues, there is likely to be virtually no ‘Brexit dividend’ over the next Sending Review period that could be converted to fund public services,” write the “green budget’s” authors.