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Philip Hammond is unlikely to eradicate public borrowing by the mid-2020s, the Institute for Fiscal Studies said on Thursday, as it predicted there would be another spending splurge before the next general election.
The chancellor confirmed during the Budget on Wednesday his target of balancing the government’s books by around 2025, but outlined spending plans that sharply lift borrowing over the short term and then cut it later.
In spite of a significant downgrade to official forecasts for economic growth and tax receipts, Mr Hammond chose to announce a package of giveaways for the next two years, including additional spending on the National Health Service and the abolition of stamp duty for most first time home buyers.
Paul Johnson, director of the IFS, said the government’s figures implied that it would be focused on deficit reduction after 2019-20 — about two years ahead of the next election.
But he said it would be wrong to take those plans at face value, predicting ministers would come under pressure to increase spending again because of the long years of austerity since the financial crisis.
Mr Johnson added “the purse strings are likely to be loosened once again . . . The chances of getting to budget balance by the mid 2020s look remote”.
In his Budget speech, Mr Hammond sought to keep himself on track to hit his target of cutting borrowing to zero by the mid-2020s by pencilling in a further year of spending cuts in 2022-23.
The government’s plans imply that day-to-day spending on public services per person will be reduced by 3.2 per cent in real terms over the next five years, but virtually all of this reduction is set to occur after 2019-20. This would extend the squeeze on public spending since the financial crisis to 13 years.
Day-to-day spending on public services per person this year is already 9.9 per cent lower than in 2007-08.
Reduction in day-to-day spending on public services per person since 2007-08
If the Conservative party meets its 2017 election manifesto pledge to increase NHS spending per person in real terms during this parliament, other Whitehall departments will face cuts between now and 2022-23 averaging 6.5 per cent, according to the IFS.
The government’s plans to cut borrowing also assume that tax revenues from 2019-20 onwards will be boosted by inflationary increases in fuel duty.
But the last time the government raised fuel duty rates was in April 2010. Since then, ministers have instead chosen to freeze the rates — at a total cost of £6bn a year — fearing that any attempt to raise it would generate protests from motorists and hauliers.
The Office for Budget Responsibility, the fiscal watchdog, on Wednesday described the latest announcement that fuel duty rates next year will again be frozen as “inevitable”.
If the government chose to freeze fuel duty for the rest of this parliament, tax revenues would be £3bn lower — and borrowing £3bn higher — than currently forecast in 2022-23, said the IFS.
The government’s charter for budget responsibility, which was set out by Mr Hammond last year, committed the government to “return the public finances to balance at the earliest possible date in the next parliament”. At the time, this was expected to mean sometime between 2020 and 2025.
The IFS analysis echoed the view of the OBR, which said the government’s objective “looks challenging”.
If public borrowing were to remain permanently at the level that the OBR currently predicts for 2022-23, and economic growth stays at the current subdued rate, the IFS estimated it would take until “well past the 2060s” before debt fell as a share of national income back to the levels that existed before the financial crisis.
Even that projection “assumes no recessions for half a century”, said Mr Johnson, adding “I’ll be dead [by then].”
Meanwhile, John McDonnell was in the spotlight on Thursday after he struggled to answer questions from journalists about the extra cost of borrowing under a Labour government.
The shadow chancellor was unable to give a figure for the higher costs of servicing extra debt under Labour’s manifesto plans, saying: “That’s why we have iPads and that’s why we have advisers.”
Mr McDonnell told the BBC that the cost of servicing debt would be “minimal” because interest rates were so low.
Britain is already spending £44bn a year on servicing its existing £1.8tn debt pile. Labour has pledged to borrow £250bn over a decade for capital spending.
Mr McDonnell believes that the additional spending would “pay for itself” because it would generate extra economic growth.
The shadow chancellor also struggled when asked elsewhere how much a Labour government would pay the EU for the Brexit divorce bill, saying he could not give an answer because the government would not be “open and transparent” about its liabilities.