ENDING austerity would cost Philip Hammond £33 billion a year, a new report suggests.
But the Institute for Fiscal Studies, the respected think-tank, said this would require the Chancellor to ditch his target of balancing the nation's books by the middle of the next decade and instead leave the deficit at its current level of 2.4 per cent of GDP.
This would allow additional borrowing to fund a £17bn boost for public services, £5bn of tax cuts and an £11bn increase in benefit spending while still seeing state debt fall as a share of national income so long as the economy continued to grow as expected.
The analysis comes as speculation is mounting that Mr Hammond might be preparing to use his autumn Budget to ease the austerity policies in place since Conservatives took office in 2010.
While recognising that abandoning austerity would require "a very sharp change in direction", Carl Emmerson, the IFS’s deputy director, said it was "an option in a way that it was not an option back in 2010".
But he warned it would leave the Chancellor with "less room for manoeuvre" if growth stalled as a result of Brexit.
Having soared to 9.9 per cent of national income in 2009/10 after the financial crisis, the deficit - the amount the UK Government spends more than it takes in taxes and other revenues each year - now stands below its pre-crisis level of 2.6 per cent of GDP and is the lowest it has been since 2003/04.
"We could choose to continue to run deficits of around the current level over the longer term," said Mr Emmerson, who unveiled his analysis at the Institute for Government in London.
"If the economy were to grow as expected this would be sufficient to see debt fall as a share of national income over the longer term.
"It would mean that over the next few years household incomes could be better supported and a greater quality and quantity of public services could be enjoyed. But it would also involve planning to live with elevated public sector debt for longer.
"It could give the Chancellor less room for manoeuvre if the economy were to suffer badly, for Brexit-related or other reasons, over the next few years. And it would almost certainly require the abandonment of the pledge to eliminate the deficit in the mid-2020s," he explained.
If Mr Hammond chose to increase taxes to shore up public service spending instead, he could raise £5bn a year without affecting the deficit by cancelling the planned cut in corporation tax from 19 per cent to 17.
Sticking to the 2025 target for eliminating the deficit, which has already slipped a decade from the 2015 deadline first set by George Osborne, would mean a continuing squeeze on benefits and public spending and rising taxation, said Mr Emmerson.
"As ever, the Chancellor has choices and as ever there are trade-offs," stressed Mr Emmerson.
"He could decide to spend and borrow more, he could decide to spend and tax more or he could decide to stick with his current plans and see spending continue to fall.
"He is not going to be able to give everyone everything they want and the sooner he makes plain what his choices are the better for all."
The IFS deputy director said the impact of Brexit on economic activity could be expected to deliver a hit of around £3.5bn a year to the public finances in the longer term, although there might be a short-term gain as companies scaled back investment, which would otherwise attract tax breaks.
"Economists are pretty much agreed that leaving the European Union and leaving the single market will be bad for the UK economy and bad for the public finances," declared Mr Emmerson.
"What economists are not agreed on is the size of that impact. The most public finance-friendly Brexit will be the one where tariff and non-tariff barriers are not increased too much."
Changes to the Government's programme following the snap election have not significantly altered its fiscal position, said the think-tank chief, noting how the £1bn cost of the DUP deal to prop up Theresa May's minority administration was "not a big deal" in the context of the overall budget.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereLast Updated:
Report this comment Cancel