Chancellor will fail to cut deficit by 2025 without extra taxes, Institute of Fiscal Studies says
Philip Hammond will need to impose tax rises worth at least £30bn to reach his target of balancing the public finances by 2025, undermining hopes that the chancellor will go into his autumn budget with plenty of spare cash to ease austerity, according to a leading economic thinktank.
The Institute for Fiscal Studies (IFS) said the government could be forced to find up to £41bn in extra taxes by the middle of the next decade once the costs of Britain’s ageing population are taken into account.
The gloomy outlook is expected to put a dampener on Hammond’s assessment of the public finances, which he said in his budget speech allowed him to consider increases in spending in the autumn budget.
In an upbeat account of the economic outlook by the Treasury’s independent forecaster, the Office for Budget Responsibility, the chancellor said he felt “Tiggerish” in contrast to the Eeyores on the Labour benches and said he would take a “balanced approach” to planned public spending cuts.
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Hammond said: “If in the autumn the public finances continue to reflect the improvements that today’s report hints at, then in accordance with our balanced approach … I would have the capacity to enable further increases in public spending and investment in the years ahead.”
But Paul Johnson, director of the IFS, said to reach the deficit target without further cuts to public spending, the government would need to find £14bn from the middle of the parliament and another £18bn in extra taxes from 2023 to 2025.
“Put these two together and on current forecasts, just keeping spending constant as a fraction of national income beyond 2019–20 and reaching budget balance by the mid-2020s would require tax rises of £30bn a year.
“And that’s before additional demographic pressures which could add another £11bn a year to the money the government would need to find from somewhere in 2025 if it wants to cover the additional demands for health, pension and social care spending,” he said.
Johnson said the pressures on public services were “undeniable” and it was likely that the government would need to address many of them in the short term.
“Many of the public services are struggling in a way that they were not two or three years ago. Safety in prisons is being compromised. The NHS is visibly failing to cope as well as it was. Local government, having done a remarkable job of coping with cuts, is showing the strain.”
The government could also face a backlash once “further substantial cuts in the generosity of working-age benefits” were imposed from April,” he said. More than three-quarters of the scheduled welfare cuts had yet to take effect, the IFS said.
Extra taxes on the self-employed, who pay lower national insurance than employed workers, and owner-managed businesses which pay themselves in dividends, were included in Johnson’s list of potential tax rises.
However, the government had failed to persuade parliament to back extra taxes, leaving Britain more reliant on a small number of high-earning taxpayers to finance public spending. While this may be desirable in terms of distribution between rich and poor, there are risks, Johnson said.
“If high-paid jobs – and EU citizens, who are well represented among high earners in the UK – relocate elsewhere, the consequences for the exchequer will be severe,” he said.
Johnson also had a warning for Labour, saying that it would be dangerous to use extra borrowing to boost public sector spending.
“The reality of the economic and fiscal challenges facing us ought to be at the very top of the news agenda. And I mean the reality, not the spin and bluster of politicians on all sides pretending there are easy solutions, that the promised land is just around the corner, or that they can reinvent the laws of economics. There aren’t. It isn’t. And they can’t,” he said.