Treasury will need to make biggest ever annual borrowing reduction to meet Budget surplus target

TREASURY WILL NEED TO MAKE BIGGEST EVER ANNUAL BORROWING REDUCTION TO MEET BUDGET SURPLUS TARGET

The Chancellor will need to reduce borrowing by £32bn in 2019-20 – the biggest ever annual cash consolidation – in order to meet his Budget surplus target by the end of the parliament, according to a new post-Budget briefing report published today (Thursday) by the Resolution Foundation.

The Foundation’s post-Budget report shows how the Chancellor has chosen to respond to the £55bn fiscal black hole delivered by the Office for Budget Responsibility from lower productivity and pay growth.

By deciding to accommodate and actually further increase borrowing in the near-term, the Chancellor has been left needing a significant consolidation in 2019-20 to meet the fiscal mandate for a surplus in that year. Such a consolidation is, as a share of GDP, comparable to the first two years of the Chancellor’s term in office.

The scale of cash consolidation needed in this pre-election year will be made even tougher by the commitment to raise the Personal Tax Allowance (PTA) to £12,500 and Higher Rate Threshold (HRT) to £50,000 by the end of the parliament. The Foundation estimates that these tax cuts will cost a further £2.5bn by 2020-21, with a third of the gains going to the richest ten per cent of households.

The briefing shows that the gains from income tax measures (raising the PTA and HRT) announced in yesterday’s Budget were similarly concentrated among the richest households. These cuts to income tax will boost the incomes of the richest fifth of households by an average of £225, compared to an average gain of just £10 among the poorest fifth of households.

A Resolution Foundation distributional analysis of all the main tax and benefit changes announced so far this parliament shows that by 2020 the poorest fifth of households will lose an average of £550, while the richest fifth of households will gain an average of £250.

The Foundation says that the Chancellor is right not to tighten further immediately in the face of forecast revisions, particularly given a worsening global economic outlook. However, it questions the ability of the government to deliver such a sharp consolidation in 2019-20, a pre-election year.

Against this backdrop it says that spending an extra £2.5bn on tax cuts that overwhelmingly benefit rich households cannot be justified, especially when lower income households are already set to fall further behind as a result of cuts to Universal Credit.

Matt Whittaker, Chief Economist at the Resolution Foundation, said:

“The Chancellor was handed a £27bn fiscal windfall last November, most of which he spent. But having been dealt a £55bn black hole this time round he is right to delay dealing with the bigger deficit, rather than doubling down on cuts in the face of big economic headwinds.

“However by increasing spending through expensive and poorly targeted tax cuts, the Chancellor has created a herculean task of reducing borrowing by £32bn in a pre-election year. It is hard to see a government seeking to build a pre-election feelgood factor delivering a consolidation comparable to that seen during the Chancellor’s first two years in office.

“Given the obvious question marks over the government’s ability to deliver such a consolidation, the Chancellor would be better off tackling Britain’s pay and productivity crisis, which is the root cause of the £55bn black hole.

“Recovering some of Britain’s lost potential would go a long way towards filling the Chancellor’s fiscal hole and the hit to incomes many families have seen in recent years.”

Distributional impact in April 2020 of all post-election policy announcements to date

Notes to Editors

The distributional analysis models the transition to Universal Credit; build-up of measures affecting flows to Universal Credit from Tax Credits; introduction of the National Living Wage and key changes to the tax and benefit system, including: increases to the personal tax allowance to reach £11,500 and higher rate threshold to reach £42,500 in April 2017, restricting pensions tax relief, cuts to capital gains tax, freezing fuel duty, cuts to Universal Credit work allowances, freezing working-age benefits for 4 years from April 2016, measures to remove the family element & limiting support to 2 children in tax credits and Universal Credit, and abolishing class 2 NICs. Estimates also account for the introduction of the national living wage. The economic assumptions are consistent with OBR projections published at Autumn Statement 2015.