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Abu Dhabi, UAEWednesday 14 November 2018

Ending austerity in UK ‘incompatible’ with budget plan to balance books

Institute for Fiscal Studies warns that without substantial tax rises, Chancellor of the Exchequer Philip Hammond cannot deliver promised measures

Treasury chief Philip Hammond is scheduled to give his annual budget statement on October 29 and is unexpected to announce any radicla changes. Reuters
Treasury chief Philip Hammond is scheduled to give his annual budget statement on October 29 and is unexpected to announce any radicla changes. Reuters

The British government will have to spend an extra £19 billion (Dh91 billion) a year on public services by the year 2022-23 if it’s to deliver on Prime Minister Theresa May’s promise to end austerity, a respected think-tank said on Tuesday.

In an analysis of Britain’s public finances, the Institute for Fiscal Studies said Mrs May’s ambition looks incompatible with another major aspiration – to balance the books by the mid-2020s – without substantial tax rises or much stronger economic growth.

“This is going to be the toughest of circles to square,” said IFS director Paul Johnson.

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Given that the British economy is being hobbled by uncertainty surrounding Brexit, Treasury head Philip Hammond is not expected to announce any radical changes to spending in his annual budget statement on October 29.

More detail is only expected next year, when Mr Hammond carries out a broader review of spending and it becomes clearer what Britain’s exit from the EU on March 29 will mean economically.

“The decision over the spending review envelope will probably be the biggest non-Brexit related decision this Chancellor will make,” Mr Johnson said.

The government has promised increases in health, defence and aid spending over coming years. Just keeping spending constant on other public services after accounting for inflation – a limited definition of what ending austerity means – would require an additional £19 billion, according to IFS.

Britain has lived under public spending cuts since 2010, when the then coalition government dominated by the Conservatives said its priority was bringing the budget under control. While spending on health and schools was protected, other spending was slashed.

Mrs May told her Conservative party faithful this month that people should know “their hard work has paid off” and that “the end [to austerity] is in sight.”

Opponents say the cuts were too harsh and counter-productive as it meant economic growth – and therefore tax receipts – was lower, too. Many say the 2016 vote to leave the European Union was partly a revolt against austerity, particularly in the north of England, where manufacturing has fallen into decline.

Austerity is likely to be one of the main issues marking the next general election, which has to take place by the middle of 2022. Labour party leader Jeremy Corbyn has made it clear that easing austerity will be his party’s goal, an approach that has led to accusations he will undo improvements to public finances.

Over the past few years the budget has become more balanced and government borrowing is back to pre-crisis levels at just over 2 per cent of the gross domestic product. Total debt, though, is much higher, at around 85 per cent of GDP, having risen over the last decade by more than any since World War II, according to the IFS.