Without tax hikes or better-than-expected economic growth Theresa May’s aim to stop austerity is “unlikely to be compatible” with the chancellor’s target of eradicating the deficit by the mid-2020s, according to IFS’s Green Budget published today.
Chancellor Philip Hammond had “a big choice” to make, the think-tank said.
IFS director Paul Johnson said keeping spending on services constant in real terms would cost £19bn a year more than currently planned by the end of parliament.
“Alternatively, the chancellor could stick to his guns on the deficit and leave many public services to struggle under the strain of a decade and more of cuts,” he added.
The report said that cuts to public services – especially local government and prisons – “are starting to bite” and that “further cuts in funding for local government could come at a high cost”.
The IFS suggested the extra £19bn a year could be provided by raising tax revenue by 1% of national income and adding one percentage point to all income tax rates, all national insurance contribution rates and the main rate of VAT.
However, this would put the tax burden in the UK at the highest level seen in the post-war era.
Johnson said that the chancellor’s ability to make these tax changes could be “constrained by the lack of a parliamentary majority”.
The IFS report also challenged the notion of a “Brexit dividend” that could be spent on public services, which was suggested by Hammond at the Conservative Party conference earlier this month.
The ability of the chancellor to end austerity and balance the UK’s books is also complicated by the increased NHS spending announced in June, and existing commitments to increasing overseas aid and defence spending.
Funding these increases would imply cuts of £14.8bn by 2022-23 to spending on other public services if the provisional spending totals from the last spring statement are kept to.
Looking forward to next year’s spending review, the IFS said: “All public spending should be considered at the same time – ideally alongside the related issue of how much to raise in taxes – rather than announcing large chunks in advance without seeming to factor in the impact on funding for other public services or how they will be paid for. “That is not ‘how responsible people budget’.”
