The only way the chancellor can end austerity is to borrow substantial sums or raise Britain’s tax burden to the highest level for nearly 70 years, the Institute for Fiscal Studies (IFS) has warned.
In its closely-watched green budget, a survey of the UK economy and public finances, the IFS said that even the mildest version of “ending austerity” would cost a minimum of £19bn – the equivalent of a penny on income tax, National Insurance and on VAT.
The IFS added that there was effectively no prospect of a “Brexit dividend” for the public finances and warned that UK economic growth would remain weak for another two years.
Its report comes a fortnight ahead of the chancellor’s winter budget, in which he will unveil his latest plans for borrowing and spending.
But the IFS said that Philip Hammond can only end austerity – in other words cancel major planned spending cuts – through significant tax rises or by borrowing so much that he breaks his commitment to eliminate the deficit by the middle of next decade.
It added that the sum – which it put at a provisional £19bn – would be bigger still if Mr Hammond abolished the benefits freeze and increased the generosity of other payouts.
Paul Johnson, director of the IFS, said that these decisions, which will form key parts of the budget, will “probably be the biggest non-Brexit related decision this chancellor will make”.
“He has a big choice,” he added. “He could end austerity, as the prime minister has suggested.
“But even on a limited definition of what that might mean would imply spending £19bn a year more than currently planned by the end of the parliament. An increase of that size is highly unlikely to be compatible with his desire to get the deficit down towards zero.
“Alternatively, the chancellor could stick to his guns on the deficit and leave many public services to struggle under the strain of a decade and more of cuts.
“He could reconcile these demands by raising taxes, and in principle there are plenty of good options, but the overall tax burden is already high by UK historical standards and he could be constrained by the lack of a parliamentary majority. This is going to be the toughest of circles to square.”
An increase in the tax burden of that scale would lift it to the highest level since the late 1940s and early 1950s – though it would still leave it in the middle of the pack of other developed economies.
But Mr Johnson said that it was far more likely that the government would simply borrow more. “Increasing borrowing is clearly the line of least resistance,” he said. “If I had to guess I would guess borrowing will be higher than the number in the spring statement.”
The IFS said that the extra money was significantly higher because of the extra commitments the chancellor had already made to spend more on the NHS and on international aid.
And it calculated that even if the UK enjoys an economic bump if it seals a deal to leave the European Union, the scale of the so-called “Brexit dividend” – the money the Treasury might save on contributions to the EU – might only be around £1bn a year by 2022/23 – a rounding error in fiscal terms.
John McDonnell, Labour’s shadow chancellor, said: “This heaps yet more pressure on the chancellor to explain how he is going to deliver on the Tory promise of ending austerity.
“With billions of cuts in the form of Universal Credit still to come, and public services at breaking point, tinkering around the edges is not enough. It’s time the chancellor finally came clean about where the additional funding for the NHS is coming from.”
A Treasury spokesperson said: “Our balanced approach is getting debt falling and supporting our vital public services, while keeping taxes as low as possible. This year, we have already committed an extra £20.5bn a year to the NHS, scrapped the public sector pay cap, and frozen fuel duty for the ninth year in a row.”