Economic slowdown and spiralling cost of student loans will force government to break its deficit rule

This article is more than 10 months old

This article is more than 10 months old

The government is on course to overshoot its deficit target this year by £16bn after a series of spending pledges, a slowdown in the economy and the spiralling cost of student loans stripped the Treasury of £43bn.

The Resolution Foundation, an independent thinktank, warned that the £27bn of spending “headroom” set aside by former chancellor Philip Hammond in March to cope with the costs of Brexit had evaporated over the last six months, leaving the government with a hefty deficit.

In a report that was due to be released ahead of Sajid Javid’s first budget on 6 November, which was scrapped last week, the independent thinktank said the Treasury was going to be left with little option but to break its rule that caps the annual shortfall in spending at 2% of GDP.

Labour has criticised Javid for refusing to publish official budget forecasts by the Office for Budget Responsibility, which are expected to be cancelled along with the budget, knowing they are likely to show the government has breached its deficit rule.

A slowdown in the economy this year following a slump in manufacturing and construction activity has reduced government income by more than £10bn in the next financial year, the report estimated.

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Revisions to the treatment of government liabilities, including student loans, many of which are unlikely to be repaid, added a further £19bn to the total deficit. Extra spending commitments on hospitals, police and schools added another £13bn, the report said, increasing the shortfall between income and expenditure since March to £43bn.

Without tax increases or a retreat on spending pledges, the deficit next year was likely to be nearer 3% and possibly higher should Brexit knock GDP growth, hitting government income further.

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Richard Hughes, an economist at the foundation, said Javid should ditch inflexible fiscal rules that can only be met with short-term decisions that harm the economy’s future.

He sad: “Fiscal rules have guided, if not always bound, tax and spending decisions over the past 20 years – from Gordon Brown’s golden rule to George Osborne’s goal of eliminating the deficit.

“But with the UK’s current fiscal rules set to expire next year, and the government on course to miss them by £16bn anyway, the chancellor should take this opportunity to rewrite the fiscal rule book and set a new framework to guide government policy over the coming decade.

“The UK’s new fiscal rules should reflect current economic realities such as record low interest rates, and the broad political consensus around the need to invest in improving productivity, tackling climate change, and renewing our public service infrastructure.”