New chancellor Rishi Sunak has been warned that the only sustainable way to boost public services when he delivers his first Budget next month will be to put tax cuts on hold and scrap some reliefs.
Think tank the Resolution Foundation said that while Sunak was expected to confirm plans for a bigger state, with total government expenditure set to rise to 40% of GDP – higher than at any point while Tony Blair was prime minister – capital spending would not help public services.
It predicted Sunak’s proposals, due on 11 March, would include up to £100bn of extra capital spending that would take the government’s total managed expenditure above £1 trillion a year for the first time by 2023-24.
The foundation, which focuses on the needs of people on low- and middle incomes, added that borrowing was set to rise from £41bn in 2018-19 to £64bn by 2021-22, after a decade of falls.
According to the foundation, the Office for Budget Responsibility is on course to deliver a “modest fiscal windfall” of around £8bn for Sunak on Budget day, but it said the new chancellor still faced tough choices over raising taxes or watering down his fiscal rules
The foundation said the Ministry of Justice, the Department for Environment, Food and Rural Affairs and Department of Transport had experienced cuts of at least 30% since 2009-10, and noted that reversing half of the cuts to non-health departments would cost around £24bn. Additional spending on welfare to prevent further rises in child poverty would cost around £5bn, it added.
The foundation's economist Jack Leslie urged Sunak to look beyond big-ticket infrastructure announcements – such as HS2 and improvements for existing rail lines – and deal with longstanding fiscal inequalities that impacted the delivery of public services.
“The decisions taken by the chancellor in the new government’s first Budget will help shape the economic policy backdrop to this whole parliament,” he said.
“The chancellor’s big-spending plans to ‘level up’ the country through infrastructure projects will lead to a bigger state than at any point under Tony Blair, and marks a big shift for a traditionally small state Conservative Party.
“But new roads and rail lines are only part of the story for a government wishing to turn the corner on a decade of austerity.
“If the chancellor wants to increase spending on day-to-day public services in a fiscally responsible way he will have to change another of his party’s traditional priorities – lower tax.
“Good news on the public finances from the Office for Budget Responsibility will still be too modest to change the big picture decisions of this parliament. Higher spending will require higher taxes.”
Leslie said that with tax increases being the only way to “sustainably fund additional day-to-day spending” Sunak could secure £8bn for the nation’s coffers by freezing – rather than raising – income-tax thresholds and generate £3bn by scrapping Entrepreneurs Relief.
The foundation also wants to see the chancellor “fire the starting gun” on more fundamental tax reforms, such as reforming the nation’s pensions tax relief system, fixing holes in the “notoriously leaky” inheritance tax system, and “rebooting” the council tax system – which it said discriminated unfairly against the north of England.
In relation to pensions reform, the foundation said that more than £2bn could be raised by capping the tax-free lump sum at £42bn alone – while the “highly regressive” system cost the nation £35bn a year.
It added that “relatively minor” council tax changes, along the lines of those made in Scotland, where increased rates for higher bands were introduced, would generate an additional £1bn in England.