U.K. Faces Austerity as Brexit Weighs on Deficit, IFS Says

  • Chancellor has one-in-three chance of missing new budget goal
  • Spending cuts and tax increases to extend into the 2020s

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 aging population.

Photographer: Christopher Furlong/Getty Images

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 deficit no later than 2024-25, years beyond the goal set by Hammond’s predecessor George Osborne, will still require spending cuts and tax increases of as much as 34 billion pounds ($42 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.

“The new chancellor may not find it all that easy to meet his target of eliminating the budget deficit in the next parliament," IFS Director Paul Johnson said. "If the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”

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.

Hammond is seeking to reduce the structural deficit to no more than 2 percent 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. Beyond then, the aim is to return the public finances to balance as soon as possible in the next parliament.

“I wouldn’t put a lot of money” on Britain achieving a balanced budget by 2024, Johnson told a briefing in London. “But I don’t think it would be a disaster if we didn’t.”

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 aging population.

“The government is committed to repairing the public finances and living within our means so that we can build an economy that works for all," the Treasury said in response to the IFS report. "That has required some difficult decisions on spending, but we are determined to deliver efficient public services which provide maximum value for every pound of taxpayers’ money.”

With inflation set to erode real incomes, Oxford Economics sees GDP growth slowing to 1.6 percent in 2017 and 1.3 percent in 2018. Prime Minister Theresa May’s plan to leave the single market and the customs union could reduce output by 3 percent by 2030, its U.K. 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.

The Brexit path chosen by May is “one of the economically more damaging” options, with her goal of “frictionless” trade after Britain leaves the bloc unlikely to be achieved, he said.

“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.”

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