Tax and spending experts predict slow growth and high inflation will lead to hole in public finances by end of current parliament

Britain’s leading tax and spending experts have warned Philip Hammond that his options are limited in this month’s autumn statement after predicting that slower growth and higher inflation will punch a £25bn hole in the public finances by the end of the current parliament.

The Institute for Fiscal Studies said that if economic forecasters were right about the impact of Brexit, the new chancellor would have to extend austerity after the next election in order to finally eradicate the budget deficit built up during the financial crisis of 2008-09.

A new report by the IFS found that the £10.4bn surplus pencilled in for 2019-20 by George Osborne in his last budget as chancellor in March was now on course to be a £14.9bn deficit.

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Thomas Pope, a research economist at the IFS and an author of the report, said: “The new chancellor’s first fiscal event will not be easy. Growth forecasts are almost sure to be cut, leading to a significant increase in the deficit even if all the very challenging spending cuts currently planned are in fact delivered.

“Given the levels of uncertainty he might be wise to respond cautiously for now. Any new fiscal targets should be reasonably flexible. Any decisions to increase spending or cut taxes in the short run should be taken in the knowledge that significant further austerity after 2020 looks to be on the cards.”

Hammond has already announced the scrapping of Osborne’s plans to run a budget surplus by the end of the parliament but has also made it clear that there will be no “splurge” of spending in the autumn statement.

Instead, the chancellor is looking to target his limited fiscal firepower at so-called “shovel-ready” schemes that offer the highest economic benefits and which can be started with the minimum of delay.

The IFS said it made sense for Hammond to be cautious due to the deteriorating outlook for the public finances since the budget. At that time, the independent Office for Budget Responsibility predicted that the deficit would fall from £55.5bn in the current 2016-17 financial year to £21.4bn in 2018-19 before going into the black the following year.

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The IFS said that “virtually all” forecasters had revised down their predications for growth and revised up their expectations for inflation in the years ahead. Should the OBR follow suit, it is likely to predict that tax receipts will be £31bn lower by the end of the parliament than they would have been otherwise, the IFS said.

The thinktank added that spending was likely to be £6bn lower because Britain would no longer be paying contributions to the EU budget. Its calculation that the budget deficit will be £25bn bigger by 2019-20 does not take account of tax cuts promised in the 2015 Conservative party manifesto but not yet delivered, but assumes that Hammond finds the £3.5bn savings from unspecified “efficiencies” that Osborne said would be found by the end of the parliament.

The government measures the state of the public finances in two ways – by the size of the annual budget deficit and by the size of the national debt, which tots up deficits and surpluses from every year up to the present.

The IFS said the expected £25bn increase in the deficit would result in public sector net debt not falling below its 2015–16 level as a share of national income until 2019–20, despite the government’s own target for it to fall every year.

The OBR said in March that it expected national debt to be just under 83% of GDP in 2016. The IFS said that even delivering and maintaining a balanced headline budget from 2020–21 onwards would only put public sector net debt on course to reach its pre-crisis level of 40% of national income in the mid-2040s.

The IFS report said Hammond had two big decisions to make in the autumn statement which could set the direction for his chancellorship.



The pro-EU lobby group Open Britain said the IFS analysis showed the importance of the UK maintaining access to the single market.

Labour MP Pat McFadden said: “The leave campaign promised a rosy economic future where everything could be paid for from our EU contribution. These figures paint a very different story. It is critical that those on the lowest incomes do not pay the economic price for Brexit.

“These warnings from the IFS underline how important it is for the UK not to damage the trading position it currently enjoys through membership of the single market with both the market access and the attraction to inward investors which that represents.”