The UK chancellor will have virtually no space to make new long-term commitments in this autumn’s spending settlement, even though tax revenues are rebounding faster than expected on the back of an improving economic outlook, the Institute for Fiscal Studies said on Wednesday.
The think-tank published new projections for the public finances, based on economic forecasts by Citi, showing that public borrowing in 2021-22 could come in £30bn lower than the £234bn forecast by the Office for Budget Responsibility at the time of the March Budget.
This would make it possible for Rishi Sunak to announce a “sizeable short-term giveaway”, while still staying on the path for borrowing set out in March, the IFS said.
But it warned that there had been no improvement in the medium-term outlook for the public finances, with Citi’s forecasts suggesting the economy would be 3 per cent smaller in cash terms by the middle of the decade than if it had continued on its pre-pandemic trajectory.
This permanent damage to the economy, combined with the rising cost of servicing government debt, meant the chancellor could only announce new permanent spending commitments if he matched them with cuts elsewhere, funded them with new taxes or abandoned his principle that the government should not borrow in normal times to pay for everyday public spending.
“The chancellor has almost no additional wiggle room for permanent spending giveaways if he is to remain on course to deliver budget balance,” said Isabel Stockton, a research economist at the IFS.
The think-tank’s forecasts factor in the tax increases Sunak announced in March — including a sharp rise in corporation tax and a freeze in income tax — as well as cuts to pre-pandemic spending plans implied by totals set out in the March Budget.
They show that despite stronger economic growth in the near term, the current budget would still be approximately in balance — essentially unchanged from the March forecast — in 2024-25 and 2025-26.
The IFS research adds to evidence that departments will be facing a tough spending settlement for the rest of the parliament, as the chancellor seeks to address mounting post-Covid pressures on public services, while a spike in inflation threatens to raise borrowing costs.
The Office for Budget Responsibility said this month that it would take an extra £10bn a year for each of the next three years to address the immediate pressures in just three areas of public spending — the backlog in the NHS, the task of catching up on lost learning in schools, and the hole in fare revenues resulting from the drop in commuting.
But Sunak has made it clear he intends to bear down on public borrowing, despite pressure from No 10 and from MPs in more deprived northern constituencies to spend.
“For the first time in a while, the causes of fiscal conservatism — ensuring that public finances are sustainable — is gaining the upper hand,” David Gauke, the former minister, wrote this week on the website Conservative Home.
He noted that the government had seen off attempts to block the cut to overseas aid, confirmed its intention to end the temporary uplift in benefits and ruled out an outsized increase in the state pension.