Chancellor Philip Hammond will need to find £19bn more a year to end austerity, IFS warns

Written by Nicholas Mairs on 16 October 2018 in News

The think tank said that increasing income tax, national insurance and VAT to cover spending would put tax around the highest level since WWII

Philip Hammond - Image credit: PA Images

Philip Hammond will need to find an extra £19bn a year in order to meet Theresa May's vow to end austerity, according to a leading think tank.

The Prime Minister told the Tory conference earlier this month that eight years of deep public spending cuts were now "over".

But the Institute for Fiscal Studies (IFS) said the Chancellor would struggle to live up to Theresa May’s promise while keeping the long-standing Conservative commitment to eliminate the deficit by the mid-2020s.

The IFS said previous commitments worth £13bn from next year until 2022-2023 to boost NHS, defence and aid funding would mean an extra £19bn of public money a year is needed, if spending in other areas were to stay the same.

The group said such an approach would pass as the minimal definition of the “end of austerity”, but that £7bn of welfare cuts would still be left working their way through the system. 

It adds that borrowing this year might be around £5bn lower than the Office for Budget Responsibility’s spring forecast of £37bn, but that it would still fall short of achieving the Prime Minister's public finances pledge.

The findings come as part of the IFS’s Green Budget, which every year looks at the public finances and the kinds of choices the Chancellor will face ahead of the set-piece speech, which will take place at the end of this month.

The group say that adding one percentage point to all income tax rates, all national insurance contribution rates, and the main rate of VAT could cover the £19bn in new spending, but that it would put the tax burden in the UK at around the highest level seen in the post-war era.

It also warned of pushing tax up for the very top earners, given the reliance on just 0.6 per cent of adults to generate a quarter of income tax revenue.

The group added, however, that targeting wealthy older people could “improve the efficiency of the tax system”, by changing the “absurdly generous treatment of accumulated pension pots” which are bequeathed.

It also said that there is also a case for reforming council tax so that it is proportional to house value.

Elsewhere, the group reaffirmed that there would be no “Brexit dividend” by 2022-23 as savings on contributions to the EU could be less than £1bn a year by then.

They add that new spending, which is currently not required as part of the bloc, such as on border security “could easily exceed” that saving.

They add that the weak growth since Britain voted to leave the EU in June 2016 has largely been in line with forecasts so far and say that it is likely to continue into early next year.

Paul Johnson, Director of the Institute for Fiscal Studies and an editor of the green budget, said ending austerity while maintaining the deficit target would be the “toughest of circles to square” for the Chancellor.

“The decision over the spending review envelope will probably be the biggest non Brexit related decision this Chancellor will make. He has a big choice.

“He could end austerity, as the prime minister has suggested. But even on a limited definition of what that might mean would imply spending £19 billion a year more than currently planned by the end of the parliament.

“An increase of that size is highly unlikely to be compatible with his desire to get the deficit down towards zero.

“Alternatively, the Chancellor could stick to his guns on the deficit and leave many public services to struggle under the strain of a decade and more of cuts.

“He could reconcile these demands by raising taxes, and in principle there are plenty of good options, but the overall tax burden is already high by UK historical standards and he could be constrained by the lack of a parliamentary majority.”

Shadow Chancellor John McDonnell said: “This heaps yet more pressure on the Chancellor to explain how he is going to deliver on the Tory promise of ending austerity.

“With billions of cuts in the form of Universal Credit still to come, and public services at breaking point, tinkering around the edges is not enough.

“It’s time the Chancellor finally came clean about where the additional funding for the NHS is coming from.”

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