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There’s no way Hammond can end austerity and balance the books

Newspaper article

The budget is less than two weeks away. Philip Hammond will have some good news to announce on the deficit. But mostly the challenges facing the UK public finances suggest that some very difficult choices will need to be made over the next few years.

First the good news. The deficit last year — at £40 billion — is £5 billion less than thought at time of the spring statement in March. This means it has now fallen to below pre-crisis levels.

Strong growth in receipts of income tax, national insurance and VAT in recent months suggests that we can now expect a stronger reduction in borrowing over future years. Without any change to policy we could be on course for a deficit of £15 billion in 2022–23 rather than the £21 billion forecast in March.

Now the hard part. Mr Hammond’s spring statement plans were predicated on yet more cuts. The budgets of many central government departments are to be reduced next year, with some further cuts pencilled in for the following three years. And some £7 billion of the £15 billion of working-age benefit cuts set out by George Osborne after the 2015 general election are still in the pipeline.

Even if these spending cuts were implemented we would still be some way off the government’s objective of eliminating the deficit entirely by the mid-2020s.

Delivering this has been made harder by announcements from the prime minister since the spring. First came the commitment to a substantial increase in NHS spending (£20 billion by 2023–24), then yet another freeze to the rates of fuel duties (costing the Treasury £800 million per year) and finally — and hardest of all — the promise of an “end to austerity”.

Unfortunately without substantial tax rises or much better growth prospects there is no way for the chancellor both to end austerity for public services and to eliminate the budget deficit.

Keeping to the spring statement plans, combined with the commitments to spending on the NHS, defence and aid, would mean that a total of £19 billion would be cut from the day-to-day budgets of unprotected public services by 2022–23.

That would imply austerity for these departments continuing at broadly the same pace as it has since 2010. Could such plans really be delivered?

There are alternatives. But not easy ones. We could spend more and tax more, as many other countries do. But with the tax burden already at high levels by UK historical standards that might be something we don’t want to do.

We could choose not to reduce the deficit further. As well as supporting public services this could help the economy to navigate Brexit. But maintaining the current level of deficit over the longer-term could, given the tendency of the UK economy to be hit by a recession every decade, not be fiscally sustainable.

The chancellor could defer many of these decisions until a later date. Given Brexit-related uncertainties this inaction might be the right thing to do. But it might prove to be pain delayed rather than pain avoided.

This article was first published in the Times newspaper and is reproduced here with full permission.

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The IFS Green Budget 2018, in association with Citi, ICAEW and the Nuffield Foundation, is edited by Carl Emmerson, Christine Farquharson and Paul Johnson, and copy-edited by Judith Payne. The report looks at the issues and challenges facing Chancellor Philip Hammond as he prepares for his Budget ...