Boris Johnson’s government has no room left for permanent tax cuts because it has already raised public spending to the path proposed by Jeremy Corbyn’s Labour Party in the 2017 general election, the Institute for Fiscal Studies said ;on Tuesday.

In a pre-Budget report, the independent think-tank, and Citi, the investment bank, said the outlook for the public finances had “worsened dramatically” since the spring and would deteriorate further if Britain left the EU without a deal.

Christian Schulz, an economist and director at Citi, went further, saying that based on likely different Brexit outcomes under the two big parties, forecasts showed the economy could be 5 per cent bigger under Labour than the Conservatives by 2022.

Chancellor Sajid Javid significantly increased public spending for 2020-21 in the spending review last month by £13.4bn to meet the UK prime minister’s pledges on police and schools.

Alongside the earlier pledges to increase NHS spending, the IFS calculated that the government’s current spending plans had a Corbynite tinge and were barely recognisable from the promises of Theresa May at the last election.

In 2022, which is the end point for [our forecast] . . . the economy under a Labour government would be almost 5% bigger than under a Conservative government

The IFS said the budget deficit was likely to be £52.3bn in 2020-21, more than double the £21bn forecast by the OBR in March.

Paul Johnson, director of the IFS, said: “The big spending increases about a month or so ago . . . put the Conservative day-to-day spending on public services next year closer to what Labour had in its 2017 manifesto than the Conservatives had in theirs”.

This left little space, he said, for the cuts to income tax and national insurance promised by Mr Johnson ;in his campaign to become leader of the Tories and prime minister over the summer.

“Given the huge uncertainty we’ve got coming over Brexit, there really isn’t space in any forthcoming Budget for any permanent tax giveaways,” Mr Johnson added.

In his recent speech to the Conservative conference, Mr Javid did not repeat promises for tax cuts although he has described himself as a “low-tax guy”. The prime minister has continued to promise a “tax-cutting” future under his leadership.

The IFS and Citi said that with the public finances set to breach Mr Javid’s current fiscal mandate to keep the deficit below 2 per cent of national income in 2020-21, the chancellor should not rush to ditch his rules and institute new ones while Brexit uncertainty raged.

Any rule set now, the institute said, would almost certainly be too tight to operate under a no-deal scenario and too loose for a world where Brexit runs smoothly. But once the uncertainty had passed, it joined the Resolution Foundation ;in calling for the government to take greater note of the assets it holds in future fiscal rules.

Recommended Britain needs a new fiscal and monetary framework

The IFS publishes its “green Budget” each year to improve the debate around the options for the chancellor ahead of chancellor’s Commons set piece and it is widely seen as similar to a government green paper.

The report said Britain’s economic fortunes were tied up with the outcome of Brexit and a possible general election, leading to the conclusion that the outlook would be much brighter if Mr Corbyn led the next government rather than Mr Johnson.

The UK’s Eurosceptic prime minister is pushing for a general election to break the Brexit stalemate but opposition parties won’t trigger a vote of no confidence ;in his government until he has removed the threat of a no-deal Brexit by requesting an extension to the October 31 deadline for the UK’s departure.

Meanwhile his hopes of securing a deal with the EU appear to be fading ;after Brussels told Mr Johnson last week that his plan for tackling the vexed issue of the Irish border was not, as it stands, the basis for intense negotiations.

Christian Schulz, an economist and director at Citi, said that its base case forecast was for a no-deal Brexit if the Conservatives won an election and an end to Brexit if Labour was the strongest party in a coalition government.

The current economic uncertainty and Brexit has undermined any kind of fiscal strategy. It’s fair to say that the government is pretty much making it up as it goes along

Labour has said that if it is elected, it would try to negotiate a new Brexit deal with the EU before holding a referendum offering people a choice on the revised deal or Remain.

“In 2022, which is the end point for [our forecast] . . . the economy under a Labour government would be almost 5 per cent bigger than under a Conservative government,” Mr Schulz said.

Citi’s view of the economic outlook under a no-deal Brexit — a mild recession followed by anaemic growth — was shared in the outlook of the public finances under a similar scenario forecast by the IFS. It said that public sector borrowing would rise to over £100bn a year by 2021-22 if the government also had a modest fiscal stimulus, a level last seen in 2013-14.

In the circumstances, the IFS said that any efforts to cushion the blow of crashing out of the EU would need to be followed by “a swift return” to austerity in public services to repair the persistent damage done to the public finances.

Mr Johnson said: “The current economic uncertainty and Brexit has undermined any kind of fiscal strategy. It’s fair to say that the government is pretty much making it up as it goes along.”

Part of the deterioration in the public finances has come from a new accounting treatment for student loans, which recognises that the switch to higher fees did not save the government as much as the 2010-15 coalition government because almost half of the loans will be written off.

Carl Emmerson, IFS deputy director, said that there was a case to use a measure of the public sector net worth in a future fiscal rule although some caution would be needed because valuations of public sector assets are difficult.

He added that a Labour government that wanted to nationalise the water industry ;among other privately owned assets would need to move to this sort of approach because public debt would have to be issued to acquire the assets. “It would make sense in that would to be thinking about a fiscal target that incorporates the value of public sector assets in a smarter way”.

Letter in response to this article:

Outlook under Labour: the view from the IFS / From Paul Johnson, Director, Institute for Fiscal Studies

Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.