UK Chancellor Philip Hammond is facing a £20bn black hole that will make it hard to meet demands to boost public spending.
The government has committed to creating a budget surplus by the mid 2020s – but new figures show there will be little room for Budget giveaways.
According to the Institute for Fiscal Studies (IFS), “terrible” growth in UK productivity – currently averaging just 0.4% a year – is playing havoc with plans to cut the budget defecit.
“It is hard to see how the Chancellor can both maintain the credibility of his fiscal targets and respond effectively to the growing demands for spending,” says the IFS report.
The stark warning follows news that the Office for Budget Responsibility (OBR) it is likely to downgrade its forecast for productivity growth.
Downgrading just halfway towards the productivity growth seen over the past seven years could put the deficit on course to be almost £20bn higher in 2021–22 at roughly £36bn, rather than the £17bn forecast by the OBR in March.
No end to austerity
IFS deputy director Carl Emmerson said: “Public sector workers, the NHS, the prison service, schools and working-age benefit recipients, among others, would like more money.
“Even if Mr Hammond does find some, unless it did represent a very big change of direction, it won’t mean ‘the end of austerity’.”
He said tight spending settlements, net tax rises and cuts to working-age benefits were all putting downward pressure on borrowing over the next two years.
“Given all the current pressures and uncertainties – and the policy action that these might require – it is perhaps time to admit that a firm commitment to running a budget surplus from the mid 2020s onwards is no longer sensible,” he added.
The Chancellor may have a little short-term wriggle-room, however. Borrowing last year is currently estimated at £6bn lower than forecast in the March Budget. Over the first six months of this year, it has continued to run below forecast.
As a result, despite weak economic growth, the deficit could come in around £7bn lower than forecast this year, at around £51bn.