Rishi Sunak’s plans to pump more money into public services are much less generous than they seem, the Institute for Fiscal Studies said on Thursday, as the think-tank predicted he would eventually need to tax or borrow more in order to top up day-to-day spending.
The measures set out by the chancellor in Wednesday’s Budget will raise overall government spending by £76bn over five years, bringing the size of the UK state up to 41 per cent of national income.
But Paul Johnson, IFS director, said that while the plans to raise investment to 3 per cent of gross domestic product were “genuinely very big”, an average annual increase of 2.8 per cent in day-to-day spending on public services was far smaller than Mr Sunak had made it sound.
The chancellor said the 2.8 per cent increase meant spending by Whitehall departments would on average grow twice as fast as the economy. But the increase looked “suspiciously front-loaded”, said Mr Johnson, with spending rising by more than 4 per cent in this fiscal year and next, but only by 2.1 per cent in 2022-23.
Moreover, much of the new money would simply replace funding that had previously come from the EU or would be needed to fund a post-Brexit expansion of customs and border controls.
After taking account of this, per capita spending on public services would on current plans remain well below 2010-11 levels at the end of the parliament, suggesting that Mr Sunak might announce further rises in future Budgets, after changing the fiscal rules to accommodate them.
“You might be suspicious that when push comes to shove, the chancellor will top up [spending] rather than take tough decisions,” said Ben Zaranko, an IFS researcher.
Mr Johnson argued that in reviewing the fiscal rules, the chancellor should “look hard” at the way the current framework favoured capital spending.
There was a big risk that the rapid rise in investment would lead to underspending or to money being wasted, he said, while many Whitehall departments would still face tough budget settlements.
But the IFS also made it clear that even on current spending plans, the chancellor would not be able to avoid tough decisions in the autumn Budget, with government debt already set to rise as a share of GDP, once the Bank of England’s post-crisis stimulus policies were taken out of the calculation.
“You can’t increase public spending twice as fast as the economy ad infinitum without higher taxes or borrowing,” said Mr Johnson. “The only way a change in the fiscal rules can help justify more spending without tax rises is if the chancellor is happy to see underlying debt rise more quickly.”
Mr Sunak faces an even tougher challenge because the coronavirus outbreak is set to hit UK economic growth and require higher spending.
On Thursday, the chancellor and Bank of England governor Mark Carney met figures from the banking industry to discuss the latest steps by the government and the central bank to try to ensure small companies survive the economic disruption caused by the virus.
This includes the government underwriting loans to businesses and the BoE providing cheap financing to banks to ensure they keep on lending.
Mr Johnson said coronavirus now looked likely to affect the long term path of the economy, as well as short term growth, potentially leaving government debt “decisively higher”.
Both the IFS and the Resolution Foundation, another think tank, said that while Mr Sunak’s £12bn package to soften the economic impact of coronavirus was welcome, the government might well need to do more.
The measures outlined so far would help retail and leisure businesses suffering a shock to demand, said the IFS, but did much less for companies that might have to shut down because staff were unable to come to work.
The warnings from the think-tanks came after the Office for Budget Responsibility, the fiscal watchdog, revised down its assumption about the productivity growth that the UK might achieve over the very long term.
Until Wednesday, the OBR estimated that after a prolonged period of weakness, productivity growth would gradually recover and from the 2030s onward return to its post-war annual average of 2 per cent. But the OBR now calculates the growth rate will be 1.5 per cent.
“We no longer believe that 2 per cent a year is [a] central [forecast],” said the OBR in an annex to its main Budget report.
In his Budget speech, Mr Sunak highlighted the OBR’s assessment that his investment plans would increase the level of GDP by 2.5 per cent in the long term.
He did not mention that the OBR had simultaneously knocked the same amount from its forecasts for long term GDP growth, creating a weaker outlook for the economy and public finances as the population ages.
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