£33 Billion A Year Cost To End Austerity, Says IFS Report

£33 Billion A Year Cost To End Austerity, Says IFS Report

It would cost Chancellor Philip Hammond £33 billion a year to end austerity, a new report has said.

But the report by the Institute for Fiscal Studies said this would require the Chancellor to ditch his target of balancing the nation's books by the middle of the next decade, and instead leave the deficit at its current level of 2.4% of GDP.

This would allow additional borrowing to fund a £17 billion boost for public services, £5 billion of tax cuts and an £11 billion increase in benefit spending, while still seeing state debt fall as a share of national income so long as the economy continues to grow as expected.

The analysis comes as speculation is mounting that Mr Hammond may be preparing to use his autumn Budget to ease the austerity policies in place since Conservatives took office in 2010.

While recognising that abandoning austerity would require "a very sharp change in direction", IFS deputy director Carl Emmerson said it was "an option in a way that it was not an option back in 2010".

But he warned it would leave the Chancellor with "less room for manoeuvre" if growth stalls as a result of Brexit.

Having soared to 9.9% of national income in 2009/10 after the financial crisis, the deficit - the amount the Government spends more than it takes in taxes and other revenues each year - now stands below its pre-crisis level of 2.6% of GDP and is the lowest it has been since 2003/04.

"We could choose to continue to run deficits of around the current level over the longer term," said Mr Emmerson, who unveiled his analysis at the Institute for Government in London.

"If the economy were to grow as expected this would be sufficient to see debt fall as a share of national income over the longer term.

"It would mean that over the next few years household incomes could be better supported and a greater quality and quantity of public services could be enjoyed. But it would also involve planning to live with elevated public sector debt for longer.

"It could give the Chancellor less room for manoeuvre if the economy were to suffer badly, for Brexit-related or other reasons, over the next few years. And it would almost certainly require the abandonment of the pledge to eliminate the deficit in the mid-2020s."

If Mr Hammond instead chose to increase taxes to shore up public service spending, he could raise £5 billion a year without affecting the deficit by cancelling the planned cut in corporation tax from 19% to 17%.

Sticking to the 2025 target for eliminating the deficit, which has already slipped a decade from the 2015 deadline set by George Osborne, would mean a continuing squeeze on benefits and public spending and rising taxation, said Mr Emmerson.

"As ever, the Chancellor has choices and as ever there are trade-offs," he said.

"He could decide to spend and borrow more. He could decide to spend and tax more. Or he could decide to stick with his current plans and see spending continue to fall.

"He is not going to be able to give everyone everything they want and the sooner he makes plain what his choices are the better for all."

Mr Emmerson said the impact of Brexit on economic activity can be expected to deliver a hit of around £3.5 billion a year to the public finances in the longer term, though there may be a short-term gain as companies scale back investment which would otherwise attract tax breaks.

"Economists are pretty much agreed that leaving the European Union and leaving the single market will be bad for the UK economy and bad for the public finances," he said.

"What economists are not agreed on is the size of that impact. The most public finance-friendly Brexit will be the one where tariff and non-tariff barriers are not increased too much."

Changes to the Government's programme following the snap election have not significantly altered its fiscal position, said Mr Emmerson, who said the £1 billion cost of the DUP deal to prop up Theresa May's minority administration was "not a big deal" in the context of the overall budget.

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