IFS: expect Spring Statement smiles from Hammond – but austerity is far from over
Think tank says chancellor will trumpet lower annual borrowing but report a much bigger deficit than predicted two years ago
Chancellor Philip Hammond Credit: PA
Chancellor Philip Hammond will be able to announce falling government borrowing in his Spring Statement this week – but that will be where the good news ends, the Institute for Fiscal Studies has warned.
A pre-statement briefing from the independent research organisation says stronger-than-expected tax receipts should allow Hammond to announce a borrowing figure for 2017-18 below the previous year’s £46bn – a significant downward revision from the £58bn predicted at one stage by the Office for Budget Responsibility.
IFS deputy director Carl Emmerson and research economist Thomas Pope said it was “just possible” that borrowing could come in at under £41bn for the current financial year, which would allow Hammond to announce a current budget surplus for the current year if levels of investment were realised as planned.
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It would be the first surplus on the current budget – where the amount of money spent on day-to-day services is less than the amount of tax raised to pay for them, with borrowing only used to fund infrastructure – since 2001-2.
However, while the IFS notes that borrowing has returned to pre-crisis levels it also observes that public debt is around 86% of national income, a level more than twice as high as it was pre-recession and “at its highest level since 1965-66”.
Emmerson and Pope say the stone in Hammond’s shoe will be new official economic and fiscal forecasts underscoring just how tough it will be for the government to meet its commitment to eliminate the deficit by the mid-2020s, which has been moved from an initial target. They said that while Hammond’s predecessor George Osborne was forecasting an eliminated deficit and £10bn surplus in 2019-20 before he was sacked as chancellor in the wake of the EU referendum, forecasts have deteriorated “dramatically” since. November’s official projection was for the government to still be running a £26bn deficit in 2022-23.
“A large part of this deterioration was ascribed by the OBR in 2016 to the likely effects of the decision to leave the European Union,” they said.
“A subsequent downwards revision occurred in 2017 as the OBR downgraded forecast productivity growth in the light of the UK’s dismal performance over the last seven years.
“So, the welcome modest improvement in the outlook for the public finances expected on Tuesday will still leave us looking at a much bigger deficit than expected in March 2016.”
Emmerson and Pope said there were grounds to believe that the borrowing picture for 2017-18 would not be indicative of the trend in future years because of projected interest-rate rises and the potential for strong tax receipts to have been a “one-off boost”.
They added that a recent High Court decision on proposed changes to Personal Independence Payments would have financial consequences that the Department for Work and Pensions estimated would cost the government £3.7bn over five years.
The IFS said it did not expect any new policy announcements in the statement tomorrow, but predicted that a pledge from the chancellor that the Spring Statement would “consider longer-term fiscal challenges and start consultations on how they can be addressed” could see new ideas floated on a range of topics.
Emmerson and Pope said proposals for tax reform, public finance aspects of social care for the elderly, adapting the tax system for the “gig economy” and the fiscal implications of the shift to electric vehicles might be contenders.
While they are not new policy announcements, Emmerson pointed to policy reforms due to take effect from next month, including a “large package of benefit cuts” announced by Osborne in 2015, and significant public-spending reductions that are still in the pipeline.
“On current policy ‘austerity’ is far from over,” he said. “Higher inflation means that this April the freeze in the nominal value of many working age social security benefits will bite much harder than before.
“The continued roll out of cuts to tax credits and of Universal Credit will also hit many low income families. Meanwhile cuts in many areas of public service spending are set to continue. Delivering a budget surplus by the mid-2020s, which the government is currently committed to, will remain far from easy.”
Emmerson and Pope’s analysis also noted that it “would not prove easy” to deliver a planned 16% cut in spending at the Ministry of Justice over the next two years with ongoing prison problems and a level of inmates that is not decreasing.
They added that even though the NHS is not being subjected to a funding cut, ministers would find it “very challenging” to keep on top of pressures against the backdrop of the ageing population and rising inflation.
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