London: Chancellor of the Exchequer Philip Hammond will need to maintain austerity if he is to achieve his aim of eliminating Britain’s budget deficit in the next parliamentary term, as Brexit creates “unprecedented” economic uncertainty, according to the Institute for Fiscal Studies.
Erasing the budget deficit after 2020, later than the goal set by Hammond’s predecessor George Osborne, will still require spending cuts and tax increases of as much as £34 billion ($42 billion; Dh155 billion), the research group said in its annual Green Budget, published in London Tuesday.
Britain’s plan to exit the European Union could add to this figure, according to the IFS, which estimated tax as a share of national income is set to rise to its highest level in 30 years.
While Britain’s economy has so far shown resilience since June’s Brexit referendum, a weaker pound is pushing up inflation, dimming the outlook for growth in the next two years, according to Oxford Economics, which collaborated with the IFS on the report. Official forecasts suggest Brexit will take a heavy toll on public finances in coming years.
“The new chancellor may not find it all that easy to meet his target of eliminating the budget deficit in the next parliament,” said IFS Director Paul Johnson. “If the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”
Fiscal targets
Hammond is seeking to reduce the structural deficit to no more than 2 per cent of national income in 2020-2021, a much easier target than Osborne’s goal of balancing the books by the end of the decade. Still, the IFS estimates he has a one-in-three chance of missing even this looser goal.
The IFS also warned that pressure on health and social-care spending may add to the risks facing the public finances, as services come under pressure from a growing and ageing population.
With inflation set to erode real incomes, Oxford Economics sees GDP growth slowing to 1.6 per cent in 2017 and 1.3 per cent in 2018. Britain leaving the single market and the customs union could reduce output by 3 per cent by 2030, its UK economist Andrew Goodwin estimates, although agreeing a transitional arrangement with the EU while making progress on a free-trade agreement may mean Brexit has a “modest” impact until 2021.
“With spending power set to come under significant pressure from higher inflation and the welfare squeeze, the consumer will not be able to keep contributing more than its fair share,” Goodwin said. “Should we fail to secure a free-trade agreement then the outcome is likely to be worse still.”
