IFS - Government on course to break its fiscal mandate while almost matching Labour 2017 offer on total day-to-day public service spending next year

9 Oct 2019 03:56 PM

Government borrowing is set to be over £50 billion next year (2.3% of national income), more than double what the OBR forecast in March. 

This results mainly from a combination of spending increases, a (welcome) change in the accounting treatment of student loans, a correction to corporation tax revenues and a weakening economy. Borrowing of this level would breach the 2% of national income ceiling imposed by the government’s own fiscal mandate, with which the chancellor has said he is complying.

Even a relatively benign no-deal Brexit would likely lead to borrowing approaching £100 billion, or 4% of national income. Under such a scenario, a temporary fiscal stimulus could help to smooth the path of growth. But it would also add to government debt, which would be on course to breach the government’s sustainable debt rule. Debt would climb to almost 90% of national income for the first time since the mid 1960s.

In those circumstances, next year’s mini-boom in public spending would likely be followed by another bust as the government struggled to deal with the consequences of a smaller economy and higher debt for funding public services.

The government is in practice operating with no effective fiscal rules at present. It has –probably rightly – abandoned its manifesto commitment to get to budget balance in the mid 2020s. Given the massive uncertainty over the direction of the economy and public finances, it is hard to conceive of a set of fiscal rules in the short term that would be appropriately constraining and give the chancellor flexibility to respond to bad economic news. A commitment not to legislate further permanent net tax cuts or day-to-day spending increases might for now be the best way to manage that uncertainty as the Treasury prepares for this year’s Budget and next year’s Spending Review. This is not the time to be implementing substantial and permanent net tax cuts.

These are among the headline findings of the 2019 IFS Green Budget, funded by the Nuffield Foundation and in association with Citi, with additional analysis from the Institute for Government. It also finds:

 On public spending

On the economy, analysis from Citi suggests:

In a separate chapter, the Institute for Government argues that:

Paul Johnson, IFS Director and an editor of the Green Budget, said:

 "Things have changed remarkably quickly in public finance land. Not only is every spending department about to see a budget increase, we have a Conservative government set to increase day-to-day spending on public services to a level far closer to what Labour promised in its 2017 manifesto than to what was implied by the Conservative manifesto. And just since March, we have moved from a position where there looked to be plenty of headroom against next year’s borrowing target to one where that target is now on course to be missed.

 "The government is now adrift without any effective fiscal anchor. Given the extraordinary level of uncertainty and risks facing the economy and public finances, it should not be looking to offer further permanent overall tax giveaways in any forthcoming Budget. In the case of a no-deal Brexit, though, it should be implementing carefully targeted and temporary tax cuts and spending increases where it can effectively support the economy. It will be crucial that these programmes are temporary: an economy that turns out smaller than expected can, in the long run, support less public spending than expected, not more."

Christian Schulz, Chief UK Economist at Citi, said:

"The UK economy is already around £60 billion smaller than it would have been without a vote to leave the European Union, with the UK missing out on a bout of global growth. Business investment is up to 20% lower than it would otherwise have been, hurting productivity and wage growth. Brexit no longer “just” determines future relations with the UK’s biggest trading partner and the transition towards them; it is also intertwined with the political outlook and thus broader economic policies.

 "Continued delay would mean more uncertainty, further denting business investment and leaving growth around just 1% a year, even with a further modest fiscal loosening. From a growth perspective, a Brexit deal is a little better, leaving growth at 1.5%, but it would leave no chance of Brexit being cancelled. A no-deal Brexit – even with a substantial stimulus – could mean no growth at all for the next two years. Remaining in the EU would be the best scenario for economic growth in the next few years."

Gemma Tetlow, Chief Economist at the Institute for Government and one of the authors of the IfG chapter, said:

"A general election might break the deadlock in parliament, but Brexit will continue to consume civil servants’ and ministers’ time. To make progress on domestic policy in this environment, the government should set clear and limited priorities, avoid frequent ministerial reshuffles, make space for longer-term thinking and be clear about how extra spending or other policies can help deliver its objectives."

Tim Gardam, CEO of the Nuffield Foundation, said:

"The Green Budget shows the remarkable pace of change in the public finances and demonstrates how vital it is that we have independent scrutiny of government, particularly at a time of such great uncertainty. People should have access to independent and accessible information they can trust about decisions that will directly affect their day-to-day lives, and that is what the IFS provides."

Two chapters of the Green Budget were pre-released:

Options for cutting direct personal taxes and supporting low earners https://www.ifs.org.uk/publications/14387

 Meeting the prime minister’s ambition to raise the higher-rate threshold for income tax to £80,000 a year would cost £8 billion a year even if implemented gradually over the period of a parliament. Mr Johnson also wants to see the threshold of National Insurance contributions increased. This is also expensive – costing £3–5 billion a year per £1,000 increase. While better targeted at low earners than any income tax cut, if the main desire is to help low earners then increasing the generosity of work allowances in universal credit would be more effective.

A road map for motoring taxation https://www.ifs.org.uk/publications/14407

Fuel duties now raise £19 billion a year less than they would have done had they stayed at the same fraction of national income as they were in 2000. They are likely to be on a path down to zero over the coming decades as we move to cars that do not run on fossil fuels. The government needs to act to change the taxation of motoring both to protect revenues and to capture the social costs of driving, of which congestion is by far the largest. A good start would be to move towards a tax per mile driven, perhaps as a first step towards a more comprehensive system of road pricing.

Report:  IFS Green Budget 2019