‘Ending austerity’ will cost the Chancellor over £30bn

Lower borrowing windfall could make Chancellor’s ‘mission impossible’ next Monday ‘just about plausible’

‘Ending austerity’ will require £31bn of additional spending by 2022-23. However, a record borrowing forecast upgrade from the Office for Budget Responsibility (OBR) will significantly ease –  though not solve – the Chancellor’s challenge next Monday, according to the Resolution Foundation’s pre-Budget analysis published today (Wednesday).

With less than a week to go until Budget 2018, the Foundation says that the Chancellor is facing a daunting task. He must show the government is on course to deliver the Prime Minister’s promise to ‘end austerity’, while meeting his fiscal ‘mandate’ of reducing the structural deficit to below 2 per cent of GDP and ‘supplementary debt rule’ of having debt fall as a share of GDP from 2020-21. Added to this, the Budget is set against a backdrop of widespread Brexit uncertainty.  Tunnel Vision finds that ‘ending austerity’ carries a huge price tag that will rise to over £31bn in 2022-23 (in nominal terms). This would include:

• Ending day-to-day departmental spending cuts (RDEL per capita). Preventing any further cuts to areas like schools and the police from 2019-20 onwards, as well as maintaining spending commitments on the NHS, Defence and International Aid would require additional spending of £26.3bn by 2022-23.
• Cancelling the final year of the benefit freeze. Ending the freeze a year early, and uprating benefits by 2.4 per cent next April, would cost around £1.5bn in 2019-20 (rising to £1.7bn in 2022-23) and prevent a low-income family with kids losing around £250 next year.
• Restoring the value of work Allowances in Universal Credit. Reversing the cuts to Work Allowances in Universal Credit, which have meant the new benefit will create many more losers (3.2m) than winners (2.2m), would cost around £3bn by 2022-23.

But while ‘ending austerity’ is expensive, the Foundation notes that the Chancellor is set to be given a big helping hand from the OBR. Lower than forecast borrowing in the first half of the year, which could continue for the rest of the year, could hand the Chancellor a £13bn windfall. If maintained in future years this would be enough to cover the additional £7bn promised for the NHS in 2019-20 and increase the Chancellor’s headroom against his fiscal mandate to almost £40bn by 2022-23.

However, the Foundation warns that the Chancellor cannot simply use this headroom to end austerity. Not only would it leave his fiscal mandate exposed to future OBR downgrades, it would also fall foul of the falling debt rule, which is now the government’s main fiscal anchor. Its analysis shows that a steady deficit scenario, keeping the public finances just within the two key fiscal targets, would leave almost £25bn of headroom by 2022-23. This would not be enough to end austerity, and too much to see any meaningful reduction in government debt.

Tunnel Vision says that while the immediate pressure for tax rises to fund additional NHS spending next year have eased, significant tax rises will therefore be needed if the government is to both ‘end austerity’ and ensure that ‘debt as a share of the economy will continue to fall’ – as the Prime Minister said in her conference speech earlier this month.

The Foundation says that while the parliamentary arithmetic makes any tax rises difficult to implement, the Chancellor does have options, including:

• Freezing the main income tax thresholds after the Manifesto targets of £12,500 and £50,000 by 2020 are hit, would save £2bn by 2022-23.
• Cancelling the planned corporation tax cut from 19% to 17% in 2020 would save £6bn, and still leave the UK with the lowest the rate in the OECD.

Matt Whittaker, Deputy Director at the Resolution Foundation, said:

“The Chancellor has a seemingly impossible task in his Budget of ending austerity, reducing the national debt and keeping the public finances protected against any Brexit uncertainty.

“But should strong recent public finances figures lead the OBR to deliver a £13bn windfall, the Chancellor’s ‘mission impossible’ may become ‘just about plausible’.

“However, ‘ending austerity’ in relation to schools, hospitals and social security carries a huge price tag of over £30bn by the end of the parliament. Ending austerity, while also keeping debt falling as a share of the economy, will therefore require tax rises.

“Any tax rises are difficult during Brexit negotiations, especially given the lack of a Conservative majority in the House of Commons. However, the government will at some stage have to examine options such as scrapping planned corporation tax cuts and using ‘fiscal drag’ to raise more from income tax. Together this could raise around £8bn a year.”