The chancellor is trapped in a budget bind and there’s no easy way out

On November 22 the Chancellor will deliver the first Autumn Budget since 1996.  He is almost certain to announce that the economic outlook is now gloomier, and the public finances weaker, than thought back in March. This is bad news for all of us, but it puts Mr Hammond in a particularly tricky situation.

Productivity – the key driver of economic growth – has been terrible since 2010. Despite forecasts consistently expecting a return to the pre-crisis norm, it hasn’t materialised yet. The Office for Budget Responsibility has stated that weak productivity growth is now likely to persist. This will mean less economic output, lower wages and, as a result, lower tax receipts and higher government borrowing.

The government aims to eliminate the deficit by the mid-2020s. If Mr Hammond takes this commitment seriously then a deterioration in the public finance forecasts means that he will have little space for Budget giveaways, and indeed we might expect a tightening in the form of further spending cuts or further tax rises on top of those already planned. 

Ordinarily, a recent general election would seem to offer an opportunity in this regard – significant tax rises have been announced in the year following every election since 1992. However, Parliamentary arithmetic makes tax rises, beyond the seemingly obligatory package of ‘anti-avoidance’ measures, look hard to deliver. If anything, small tax cuts, such as the Conservative manifesto commitment to increase income tax thresholds, seem likely.

But if tax rises look unlikely, additional spending cuts look more unlikely still. Much of the discussion in the lead up to the Budget has been about options for easing the squeeze on public spending. Current plans already imply significant additional ‘austerity’ over the next few years, with cuts to the spending of many central government departments and to the generosity of the working-age benefit system.

Seven years of cuts since 2010 have left many public services in a fragile state. There is clear evidence of strain in prisons, where violence on all measures is on an alarmingly steep upwards trajectory, and the NHS where strain from rising demand is clear in government targets being missed. The Chancellor could decide to remove the public sector pay cap, but compensating public sector employers fully for this would be expensive.

Rising inflation means that the four-year freeze to working-age benefits now represents a bigger cut to real household incomes than was intended when it was first announced. Reversing the policy would be expensive. While the government could reduce the time that many new claimants have to wait before receiving a full Universal Credit payment slightly at relatively low cost, this would do little to ease the large cuts to benefit generosity planned over the next few years.

Mr Hammond appears to be trapped on all sides. Public sector workers, the NHS, the prison service and working-age benefit recipients, among others, would like more money. Even if Mr Hammond does find some, unless it did represent a very big change of direction, it won’t mean ‘the end of austerity’ and choosing between these competing claims won’t be easy. Yet the public finances seem sure to have deteriorated and substantial tax rises seem politically impossible. So any significant easing of the public spending squeeze would mean even higher borrowing, which would make the ever receding target of eliminating the deficit by the mid-2020s seem even less likely. The Chancellor is truly in a Budget bind.

This article was first published in The Times and is reproduced here in full with permission. Thomas Pope is a research economist at the Institute for Fiscal Studies, and a co-author of a new IFS report “Autumn Budget 2017: options for easing the squeeze” which is being launched today (https://www.ifs.org.uk/events/1540).