Slower growth after Brexit vote and ageing population will hit budget over next decade, says leading thinktank

The government is on course to impose steep cuts in public spending and increase taxes by the end of the decade to their highest level in 30 years to combat the UK’s persistent budget deficit.

But slower economic growth after the Brexit vote and lower than expected tax receipts will still leave the UK with one of the largest shortfalls in public spending in the developed world, according to the Institute for Fiscal Studies.

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The leading tax and spending thinktank said downgrades in GDP growth over the next four years would strain the public finances, which are already on course to be £13bn worse off in this financial year than forecast.

Low levels of business investment and weak productivity growth were blamed for the economy’s weaker outlook for the rest of the decade, which will force ministers to raise taxes and cut spending to reduce the deficit.

About £17bn of tax rises are planned over this parliament, pushing the tax share of GDP above 37% of national income for the first time since 1986–87. Ministers are also meant to find further cuts in spending on top of the 10% already sliced from service budgets since 2010.

By 2019–20, departmental spending is expected to be 13% lower than it was in 2010 after inflation is taken into account, with cuts of about 40% to the justice, business, culture and environment budgets.

Social care, which has climbed the political agenda amid a funding crisis, is another high-profile target for cuts over the next four years alongside schools in England, which were protected with health and pension spending until this year.

Paul Johnson, the IFS director, said even without the downturn in the economic outlook after the referendum, Britons were facing three parliaments of austerity.



“For all the focus on Brexit, the public finances in the next few years look set to be defined by the spending cuts announced by George Osborne,” Johnson said.

“Cuts to day-to-day public service spending are due to accelerate while the tax burden continues to rise. Even so the new chancellor may not find it all that easy to meet his target of eliminating the budget deficit in the next parliament.

“Even on central forecasts that is going to require extending austerity towards the mid-2020s. If the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”

Highlighting the pressure on the chancellor, Philip Hammond, before his first budget next month, the IFS’s annual assessment of the public finances found that Britain’s ageing population and increasing demands on the NHS could blow an even bigger hole in the government budget over the next two parliaments.

“Taking into account possible negative effects from lower growth, the government may need to enact further measures worth £34bn [in 2016-17 terms] in order to eliminate the deficit in the next parliament,” the report said.

A Treasury spokeswoman said the government was committed to repairing the public finances so the UK lived within its means.

She said: “That has required some difficult decisions on spending, but we are determined to deliver efficient public services which provide maximum value for every pound of taxpayers’ money.”

Hammond said in the autumn statement last year that he was able to find funds to bolster public investment spending back above pre-crisis levels, with much of the extra cash to be spent on transport infrastructure.

The chancellor also said the government still planned to pay for large giveaways in the form of a higher income tax personal allowance at the basic and higher rate. If Hammond maintains freezes on fuel duty, the combined giveaway will total £4.25bn a year by 2020.





The IFS said: “Public spending, especially on health, pensions and overseas aid will be higher as a share of national income than in 2007-08, while spending on schools, defence and – in particular– public order and safety will be lower.”

The Liberal Democrats’ Treasury spokeswoman, Susan Kramer, said: “Cut after cut will be the new normal for this Conservative government, even before the effects of Brexit hit. Failure on the deficit, high taxes and rising prices. It is those on low and middle incomes who will be hit hardest.”

• This article was amended on 7 February 2017 to correct the figure needed to eliminate the budget deficit from £40bn to £34bn