New chancellor Rishi Sunak is “hemmed in” by the fiscal rules established by his predecessor Sajid Javid ahead of next month’s Budget, and will have to raise taxes or break spending rules to avoid cutting departmental budgets in 2021-22, a report has found.
The government has already promised to boost spending on the NHS, schools, defence and overseas aid in the Conservative’s election campaign.
The Institute for Fiscal Studies's pre-Budget assessment of the public finances said that even before these extra pledges are accounted for, borrowing next year could hit £63bn, £23bn more than the most recent official forecast and £19bn more than our estimate of borrowing this year. With borrowing not forecast to fall before 2022–23 it is not clear that the Conservative manifesto pledge to target current budget balance three years out would be met.
As a result, Sunak faces either increasing taxes to help balance the book or reintroducing cuts to departmental budgets.
Under the spending plans set out by Javid in September, all departments budgets will increase "at least in line with inflation" in 2020-21.
But unless Sunak scraps the rule requiring Treasury to be able to balance current spending over a three-year forecast, cuts could be reintroduced in April 2021, IFS director Paul Johnson said.
Sunak’s first Budget “could be the most important fiscal event in years”, he said.
“It will set the direction of policy for the next five years. If this new government is going to make radical change to taxes and spending this surely is the time to do it."
“The chancellor is hemmed in by a rising deficit and fiscal targets set out in the Conservative manifesto. They will allow him to increase investment spending, which will be welcome if well targeted.
“But they will not allow substantial increases in current spending, or tax cuts, to be funded by more borrowing. We have already had 16 fiscal targets in a decade, and fiscal targets should not just be for Christmas. Sunak should resist the temptation to announce another and instead recognise that more spending must require more tax.”
The other fiscal rule Javid implemented was that borrowing for infrastructure can rise to 3% of GDP, up from 2%. However, there has been speculation that Sunak, who become chancellor after Javid’s dramatic resignation earlier this month, could ditch the rules on current spending in favour of looser restrictions.
According to the think tank, if Javid's target to balance the current budget were abandoned “it would be the shortest-lived” of any of the 16 fiscal targets in the last decade.
However, there are plenty of tax rises which would “both raise revenue from better off individuals and improve the coherence of the tax system”, Johnson said.
“Top of the list should be the abolition of the misleadingly named entrepreneurs’ relief. Other candidates include reforming council tax to increase charges on more valuable properties, and ending the ludicrously generous tax treatment of capital gains at death and of inherited pension pots.”