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08.11.16

IFS: Hammond faces £25bn black hole in public finances by 2019

Government borrowing is likely to increase by as much as £25bn above the predicted levels in a bid to cope with the financial fallout from Brexit, the Institute for Fiscal Studies (IFS) said in a new briefing.

The IFS warned that the UK’s vote to leave the European Union has led to predictions of increased inflation and slowed-down growth.

The economists estimate that by 2019-20 lower growth could see tax revenues £31bn lower than forecast in this year’s Budget, if financial policy remains the same. This might be offset by £6bn lower spending if payments to the EU budget are stopped.

However, the ‘Winter is Coming: The outlook for the public finances in the 2016 Autumn Statement’ analysis stated that the overall impact of government borrowing £25bn more than forecast in the Budget, will lead to a deficit of £14.9bn in public finances, rather than a £10.4bn surplus that George Osborne was aiming for.

This would lead to public sector net debt not falling below its 2015-16 level as a share of national income until 2019-20, despite the government’s own target for it to fall every year. The latest figures from the Office for National Statistics (ONS) show that public borrowing in September 2016 rose to £10.6bn, compared to £9.3bn in September 2015.

The IFS also said that the Conservative government had “an unimpressive record” of meeting zero out of three of its fiscal targets in the last year.

The briefing welcomed the sensible plans to abandon the target to eliminate the deficit by 2019-20 following the EU referendum. However, the economists added that Philip Hammond will have two big decisions to make which could set the direction for his time as chancellor.

Firstly, he could introduce discretionary tax cuts or spending increases to boost the economy in economy, but if long run growth is lower as a result of Brexit he should also prepare for more austerity in the next Parliament. The IFS noted that Hammond “may well decide” not to respond with further austerity in the current Parliament. Instead, it said he could use the Autumn Statement to announce new measures such as a one-off boost to public sector investment spending, a temporary cut to the main rate of VAT, a time-limited tax break for companies, and a stamp duty holiday to stimulate housing transactions.

It was also suggested the chacnellor might announce new fiscal targets, but the IFS cautioned on these.

Thomas Pope, a research economist at the IFS and an author of the report, said: “The new Chancellor’s first fiscal event will not be easy.

“Given the levels of uncertainty he might be wise to respond cautiously for now. Any new fiscal targets should be reasonably flexible. Any decisions to increase spending or cut taxes in the short run should be taken in the knowledge that significant further austerity after 2020 looks to be on the cards.”

A spokesperson for the Treasury said: “The chancellor has been clear that, although we have already made significant progress in bringing the public finances under control, our debt and deficit remain too high. Sustainable public finances are necessary to build an economy that works for all and we will return the budget to balance in a way that allows us the space to support the economy as needed. The fundamentals of the UK economy are strong, and we are well-placed to deal with the challenges and take advantage of opportunities ahead.”

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