Sunak faces difficult public finances at Budget, IFS warns
Chancellor Rishi Sunak could introduce cuts worth £2bn for government departments tasked with meeting the Tories’ flagship ‘levelling up’ agenda despite the biggest tax rise in a generation
Ahead of Sunak’s landmark post-lockdown Budget due later this month, the Institute for Fiscal Studies (IFS) has said that the Chancellor was on track to lift the UK’s tax burden to the highest sustained level in peacetime with a package of ‘manifesto-busting tax increases’ at this month’s Budget and spending review.
In its Green Budget assessment of the public finances, issued with economic forecasts from the investment bank Citi, the IFS said overall government spending was on track to settle at 42% of national income, about 2% higher than before the pandemic.
It also predicts that debt would then fall, but at 89% of national income in 2025–26, it would still be 17% of national income above its pre-pandemic share.
The report highlights the UK’s strong economic recovery this year in wake of the vaccine rollout, which means that borrowing should continue to run at least £20bn a year below the March 2021 budget forecast from 2022-23 onwards with the current budget returning to surplus from 2023-24.
Despite the improved economic forecasts, the IFS state that Sunak will have ‘little room for manoeuvre’ in the Autumn Budget and spending review although the think tank does offer some wiggle room for the Chancellor, stating that he was likely to benefit from a £50bn boost for the public finances this year compared with official forecasts made in March.
The IFS warned that the pressures from an ageing population meant a growing share of spending was going towards health, while less was being left over for other areas of Whitehall spending despite Tory promises about levelling up and ending austerity.
These continually squeezed areas could have their budgets cut by more than £2bn in the next year with a possibility of even more over the next two ‘which could easily become three’.
Paul Johnson, IFS director, said: ‘The combined effects of ever-growing spending on the NHS and an economy smaller than projected pre-pandemic mean that Sunak is still likely to be short of money to spend on many other public services.
‘On central forecasts, there will be little or no scope to increase spending on things like local government, the justice system and further education, after a decade of sharp cuts.
‘That said, he still faces huge uncertainty over the direction of the economy and hence over the state of the public finances. He will be hoping against hope that stronger-than-expected growth in revenues over the next few years will help to dig him out of what still looks like a fair-sized hole.’
Against a backdrop of rising living costs amid an unfolding autumn energy crisis, and an inflation rise that looks set to increase to 4.6% in April 2022, the IFS said that the tax rises announced by the government were effectively being ‘smuggled in’ under the cover of the pandemic.
Last month Boris Johnson gave the green light to a National Insurance hike to fund health and social care, while Sunak announced plans earlier this year to raise corporation tax by 2023, reversing decades of Tory canon that they were the ‘lower taxes’ party.
The report also warns there is still heightened uncertainty over the lasting impact of Covid-19 on the economy and public finances with analysis from Citi estimating that the UK economy would be between 2% and 3% smaller in 2024-25 than before the pandemic. This figure also includes the effects that Brexit is having on the UK economy
Christian Schulz, director of European economics at Citi, said: ‘The global economic outlook has improved compared to a year ago, but uneven pandemic control and a series of supply shocks create treacherous crosscurrents.
‘For the UK, a deeper fall in 2020 has meant a larger rebound as the economy has reopened. The medium-term recovery also remains far from secure. The scarring from the pandemic may not be as large as we thought last year but the scarring due to Brexit may actually be larger, Brexit is casting a long shadow over the economy.’
Story by Ruby Flanagan of Accountancy Daily