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IFS - If these forecasts prove correct we will be worse off and government debt will remain higher for longer

The big news in the Budget was not anything the Chancellor did. Instead, it was the new economic forecasts he presented.

Reduced productivity growth will mean lower wage increases.

Working households are in line for very little in the way of a pay rise over the next few years, once inflation is taken into account.

In turn this means less tax for the Chancellor: less from income tax, less from National Insurance and less from VAT.

And this means more government borrowing.

Rather than offset this with tax rises or spending cuts the Chancellor decided to respond with some giveaways, increasing borrowing further.

Some of the biggest related to housing: additional spending on supporting new housing and the removal of stamp duty for most first time buyers.

It’s always hard to know how effective these sorts of measures will be. For the sake of millions of younger people looking to buy their first home let’s hope they do work.

Yet again fuel duties are to be frozen. Those out-of-work will no longer have to wait seven days before they can make a claim for Universal Credit.

Some additional funds were found for the NHS.

And an extra £3 billion is to be spent over the next two years in preparation for the UK leaving the European Union.

The public sector pay cap is to be lifted.

But additional funding has only been promised for nurses.

How any additional pay awards for other public sector workers will be paid for is therefore unclear.

Schools, police forces, job centres, and the military are likely to struggle to pay for higher pay awards from their existing budgets.

There were some small tax rises aimed at companies but most of these giveaways are to be financed by more borrowing.

As a result the Government is set to borrow £35billion in 2019–20.

Less than two years ago the plan was to run a surplus of £10billion in that year.

Even by 2022–23 the Government is forecast to be borrowing £26billion. And that is only achieved by extending the squeeze on public services to a twelfth year.

Whether that will really happen remains to be seen.

Increased borrowing and weaker economic growth is not a nice mix.

If these forecasts prove correct we will be worse off and government debt will remain higher for longer.

In the end of course someone – perhaps the current younger generation – will have to pay for that.

Original article link: https://www.ifs.org.uk/publications/10181

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