- Thomson Reuters
An “end to austerity” would require a “very sharp change of direction” and an additional £33 billion of spending, but would allow the UK’s deficit to stay above pre-financial crisis levels, according to a new report by the Institute for Fiscal Studies (IFS).
Ending austerity, defined as no further net tax rises, benefit cuts or cuts to public services, would require a £17 billion boost to planned spending on public services, a £5 billion net tax cut and an £11 billion increase in planned benefit spending.
“On current forecasts,” says the report, this would leave the UK with a deficit of 2.4% in 2021-22, the same level it has now and a lower level than it was before the 2008 financial crisis. However, the Conservative manifesto promised to balance the budget “by the middle of the next decade.”
Achieving a balanced budget is likely to require further tax rises and public spending cuts, says the report’s author Carl Emmerson, but that is likely to draw resistance given the strained condition of the NHS, an ageing population and Brexit uncertainty.
According to Emmerson, the UK has experienced terrible economic growth since 2008, and although it is roughly back to pre-financial crisis levels, “the problem has been that the economy is far far smaller than expected.”
Although the government’s March 2017 budget predicted a £5 billion boost to revenues in 2021-22 through an increasing tax burden – achieved through rises in dividend and council taxes, among other things – public spending is predicted to fall as a percentage of national income.
This will largely be a result of cuts to benefits, which are expected to save £11 billion in 2021-22.
Public service spending (excluding benefits, state pensions and debt interest) is also predicted to rise in real terms between 2016-17 and 2021-22 by £37 billion. But this constitutes a fall, of £27 billion on
But this constitutes a fall, of £27 billion on day-to-day spending and £10 billion on investment spending, when looked at as a share of national income. By 2019-20, spending as a proportion of national income is predicted to be at its lowest point since 2003-4.
Alternatively, reducing cuts and maintaining a deficit into the 2020s could help support more households and see debt fall as a share of national income in the long-term, says the report. But it would also give the Chancellor less flexibility if the economy was to stumble over the next few years, a concern heightened by Brexit uncertainty.
The government could also increase some taxes in order to reduce public spending cuts: if it axed the planned cut to the corporation tax (due to go from 19% to 17%), an additional £5 billion could be spent on public services or on reducing benefits cuts, without affecting the deficit.
Here’s the IFS’ chart showing the government’s March 2017 budget forecast for tax and spending over the next 5 years: