Tax rises and spending cuts needed to meet deficit goal, says IFS

The UK economy is growing too weakly to further bring down the deficit and reach a surplus by the next Parliament without tax rises and further spending cuts, according to the Institute for Fiscal Studies (IFS)

As a result of the poor growth rates, based on Office for Budget Responsibility projections, there is a 2% of GDP limit on the structural deficit.

Speaking at an event jointly held with the Institute for Government called Where Next for Tax and Spend?, IFS deputy director Carl Emmerson said: ‘Terrible economic growth since the start of 2008 has created big problems for the finances of both households and government. The government’s deficit increased from 2.6% of national income to a post Second World War high of 9.9% of national income in 2009-10. The period of “austerity” since then has been focussed on getting that deficit down through a combination of some net tax rises and some big cuts to benefits and spending on public services. 

‘Despite the UK’s weak economic performance over the last decade the Office for Budget Responsibility judges that there is currently no spare capacity in the economy. If correct this means we can’t rely on above normal levels of growth helping bring the deficit down further. Therefore the commitment made by Chancellor Philip Hammond in last November’s Autumn Statement to deliver a budget surplus “as early as possible in the next Parliament” was expected to require a combination of further tax rises and spending cuts.’

Emmerson noted there had been a £5bn net tax rise under Conservative-led governments, largely from discretionary measures such as the increase in dividend tax and council tax rise earmarked for social care.

The deficit stood at 2.4% of national income in 2016-17, meaning the UK now has a smaller government deficit than prior to the financial crisis. Tax is higher as a share of the economy than it was in 2007-08 at 37%, while public spending also now takes a slightly larger fraction of national income than it did in 2007–08, at approximately 39.5%.

In his March 2015 Budget, then-Chancellor George Osborne intended to begin running a budget surplus by 2018-19. According to current Chancellor Philip Hammond, expects the deficit to be approximately 0.7% by the end of the current Parliament.

Moves such as retaining the 19% rate of corporation tax instead of going ahead with the planned cut to 17% in 2020 would save the Exchequer £5bn per year, the IFS said.

However, falling levels of immigration, in large part as a result of Brexit, will cost the public purse £6bn by 2020-21.

The IFS’s Where Next for Tax and Spend? presentation can be seen here.

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