The think-tank noted that chancellor Philip Hammond is facing the twin pressure of maintaining his fiscal targets and effectively responding to demands for more government spending, such as increasing public sector pay.
It went on to observe that, if Hammond is serious about his fiscal aims, the “likely significant deterioration” in the public finance forecasts means there is “little space” for Budget giveaways.
In the March Budget, the Office for Budget Responsibility assumed productivity would grow by 1.6% a year, still below the more than 2% a year achieved over the 40 years leading up to the financial crisis.
Over the last seven years productivity has grown at just 0.4% a year.
Recently, the OBR indicated it is likely to downgrade its forecast for productivity growth. This means the deficit could be almost £20bn higher in 2021–22, at around £36bn, than the £17bn that was forecast in March, the IFS said.
Thomas Pope, a research economic at the IFS, said: “The first Budget of a new parliament is often the best chance a chancellor has to set out his stall.
“Mr Hammond, though, has been dealt a very tricky hand indeed. The political arithmetic makes any significant tax increase look very hard to deliver. It looks like he will face a substantial deterioration in the projected state of the public finances: were the OBR to downgrade productivity growth halfway towards the terrible experience of the last seven years, this could add £20bn to borrowing five years out.”
The fact the shape and impact of Brexit is currently unknown, only added to the overall economic uncertainty, Pope added.
Carl Emmerson, deputy director at IFS, pointed out that, even if Hammond found some money to give public sector workers, it was unlikely to mean the ‘end of austerity’.
“Tight spending settlements, net tax rises and cuts to working-age benefits are all putting significant downward pressure on borrowing over the next two years in particular,” he said.
“Given all the current pressures and uncertainties – and the policy action that these might require – it is perhaps time to admit that a firm commitment to running a budget surplus from the mid 2020s onwards is no longer sensible.”
Under current plans, public spending is set to fall by 1.7% of national income between this year and 2021-22. At the same time, day-to-day spending per capita by central government departments is forecast to fall in real terms by almost 5% (£15bn in aggregate).
This would come on top of falls of a 13% (£46bn) cut since 2010–11. Another £12bn of cuts in benefits for working-age families are in the pipeline, in addition to the £29bn implemented since 2010–11.
Responding to the IFS report, the government said the economy was “successful and resilient” and that record numbers of people were in work, adding that ministers were committed to improving living standards.
A Treasury spokesman said: “Repairing the public finances is a key part of this, so that we don’t pass our debts on to the next generation.
“We have made good progress in reducing our borrowing, thanks to our clear fiscal targets, but our national debt is still far too high at almost £65,000 for every household. We will continue to take a balanced approach, dealing with our debts while also investing in our public services, to build an economy that works for everyone.”
