The UK tax burden – the proportion of national income collected in taxes – is set to rise to its highest level in 30 years, according to the Institute of Fiscal Studies (IFS).
The United Kingdom Chancellor Philip Hammond has set himself the target of eliminating the budget deficit – the difference between what the government spends and what it receives – during the next parliament.
The report says just 1 percent reduction in UK’s economic growth between now and 2020-2021 could cause the budget deficit to rise by £7 billion. Image: pixabay-18107
To do this, he will to have raise another £34 billion through tax rises and spending cuts – a move that will extend the period of austerity well into the 2020s, says the IFS.
Hammond says he wants to keep the structural deficit – that is the budget deficit stripped of the ups and downs of economic cycles – to within 2 percent of national income during 2020-2021.
The IFS says this is an easier target than the previous one of eliminating the budget deficit by 2019-2020 – which, in his autumn statement, Hammond said was no longer feasible given that the “economic and fiscal outlook for the UK has deteriorated in the wake of the EU referendum.”
However, the IFS notes that “previous experience suggests there is a more than one-in-three chance that he will miss even this looser target.”
In an ideal world, the problem would be solved by pacier economic growth – more economic growth means more income, which raises more taxes, helping to reduce the deficit.
Economic forecasts more uncertain
But, the new IFS report – which includes analysis from Oxford Economics – suggests that economic forecasts are more uncertain than usual.
Just 1 percent reduction in economic growth between now and 2020-2021 could cause the deficit to rise by £7 billion, putting further potential pressure on the UK tax burden and public spending cuts.
Oxford Economics forecast that UK GDP growth in 2017 will be “a relatively disappointing 1.6 percent,” and an even lower 1.3 percent in 2018.
The weaker outlook is largely due to higher inflation, which is mostly a result of the recent depreciation in sterling.
‘Austerity likely to extend towards the mid-2020s’
Paul Johnson, Director of the IFS and one of the report editors, says:
“For all the focus on Brexit the public finances in the next few years look set to be defined by the spending cuts announced by George Osborne.”
He says even as public spending cuts accelerate and the UK tax burden continues to rise, the chancellor will struggle to meet the new target of eliminating the budget deficit in the next parliament. He notes:
“Even on central forecasts that is going to require extending austerity towards the mid-2020s. If the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”
The report suggests a particular threat to keeping a lid on public finances may come from pressure on health and social spending – particularly given the rising demands of a growing and aging population.