Chancellor has room to splash out £15 billion on ending austerity, say experts

Surprisingly favourable public finance figures have given Philip Hammond enough leeway to splash out £15 billion in this summer’s Spending Review to show that austerity “really is coming to an end”, a respected economic thinktank has said.

But the Institute for Fiscal Studies said that economic improvements could be knocked off course if the UK crashes out of the European Union without a Brexit deal.

And it warned that the Chancellor’s Spring Statement on Wednesday deferred crucial spending decisions in areas like social care, public service funding and benefits which will put him under pressure to raise taxes further down the line.

Delivering the IFS’s verdict on the Spring Statement, director Paul Johnson said that public finance figures from the Office for Budget Responsibility had “surprised on the upside”, with borrowing at its lowest level since 2001/02.

The figures suggest Mr Hammond has room to find “a reasonable amount of extra cash” for the Spending Review period 2020-23.

The Treasury said on Wednesday that the “headroom” built up by the Chancellor could go towards the four priorities of keeping tax low, reducing debt, public service spending and capital investment, so long as it is not soaked up coping with a no-deal Brexit.

And Mr Johnson (pictured) said he could spend as much as an additional £15 billion without taking borrowing above 2% of GDP or breaching his promise to keep debt falling as a proportion of national income.

“Extra spending of that sort would, finally, allow the Chancellor to say with rather more conviction that austerity really was coming to an end,” said the IFS director.

“It would mean spending rising not just overall in real terms, but even for ‘unprotected’ departments, and as a fraction of national income.”

But he warned: “Of course if things go wrong with Brexit, or indeed for other reasons, then that headroom could be removed.

“Remember that the OBR forecasts are all predicated on a fairly smooth transition, certainly not on crashing out of the EU without a deal.

“That would lead to lower growth and hence a fiscal cost.”

Mr Johnson said that the consensus among economists was that the UK economy would now be around 2% bigger if there had not been a vote for Brexit in 2016.

“In those circumstances the deficit would have been smaller still and the fiscal room for manoeuvre greater,” he said.

“The end of austerity could already have been rather more decisively with us.”

Mr Johnson said that the Government’s preoccupation with Brexit over the past three years was reflected in a “lack of focus” on other challenges in Mr Hammond’s statement.

The long-awaited Social Care Green Paper “didn’t even merit a mention”, there was no announcement on further and higher education funding and the public sector will have to wait until the Spending Review to learn whether an end is in sight to the lengthy squeeze on its finances, he said.

Meanwhile, seven million poorer families are losing an average of £560 a year as a result of the continuing freeze on working-age benefits, and numbers of people over pensionable age will begin to rise again from 2020.

On current trends, Mr Johnson said the UK could be heading for a situation where half of state spending goes on health, pensions and social care, compared to 30% at the turn of the century.

Arguing that this “looks hard to envisage”, the IFS director suggested the Chancellor will have to look at tax.

“Brexit matters, but it isn’t the only thing that matters,” said Mr Johnson.

“The need for an effective Spending Review, taking account of the public finance situation and the needs of public services, is urgent.

“Longer-term challenges cannot be ignored forever.

“Some of them are quickly becoming very near-term challenges.

“Getting policy right on welfare, pensions, public spending and tax will matter to us all and will require a lot more focus and attention from Government than they seem to be getting.”

Copyright (c) Press Association Ltd. 2019, All Rights Reserved. Picture (c) The Institute for Fiscal Studies.