Government 'may have to borrow £25bn more by 2019-20 than forecast in Budget'

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The outlook for Britain's public finances has worsened by £25 billion since the March Budget, the Institute for Fiscal Studies (IFS) has warned.

As Philip Hammond prepares for his first Autumn Statement as Chancellor, the IFS predicts that lower growth forecasts will push up Government borrowing and debt, while opposition parties expressed alarm about the Treasury's "Brexit black hole".

The IFS estimates that by 2019-20 lower growth could see tax revenues £31 billion lower than forecast in this year's Budget, if financial policy remains the same.

The IFS states this could be offset by £6 billion lower spending if the UK halts any payments to the EU budget.

However, the overall impact of borrowing £25 billion more than forecast in the Budget would signal a deficit of £14.9 billion, rather than the £10.4 billion surplus that former chancellor George Osborne had targeted, according to the IFS.

The predictions assume that all the challenging spending cuts announced by Mr Osborne are able to be delivered, including £3.5 billion of unspecified "efficiencies" pencilled in for 2019-20, and that Britain will stop EU budget contributions that year.

The figures, produced in an IFS report funded by the Economic and Social Research Council (ESRC), do not take account of the income tax cuts promised in the Tory general election manifesto that have yet to be introduced.

Thomas Pope, a research economist at the IFS, said: "The new Chancellor's first fiscal event will not be easy.

"Growth forecasts are almost sure to be cut, leading to a significant increase in the deficit even if all the very challenging spending cuts currently planned are in fact delivered.

"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."

The report states that Mr Hammond will have two major decisions to make in an Autumn Statement that could set the tone for his time in charge of the Treasury. 

The IFS suggest that announcing discretionary tax cuts or spending increases could help the economy through a period of uncertainty, but if long-run growth is lower as a result of Brexit Mr Hammond will need to prepare for more austerity in the next parliament.

The report insists that the Chancellor would be "well advised" to be cautious when it comes to setting targets due to heightened uncertainty, and the failure of recent governments to meet most of their fiscal predictions.

The IFS forecasts that increased inflation will make it easier to deliver on the promised £12,500 income tax personal allowance and £50,000 higher-rate threshold.

These are now forecast to cost £1 billion, rather than £2.8 billion because they represent smaller real increases.

The report states that the four-year freeze to most working-age benefits means that higher inflation translates into a deeper real cut in those benefits, and so will affect the living standards of households that receive those benefits.

Labour's shadow chancellor John McDonnell said: "The fact that the Tories have no credible plan for the economy and no plan at all for Brexit, is starting to build up problems for the public finances.

"This report further highlights the past six years of Tory failure on the economy that Philip Hammond supported every step of the way, and which has meant our economy is not properly equipped for any downturn that may arise from Brexit. 

"It is time the Chancellor learnt the lessons of George Osborne rather than repeat them." 

For the Liberal Democrats, Baroness Kramer said: "This Brexit black hole means having to take billions out of public spending or rapidly increase taxes. Yet the Government continues to pretend that all is well. They cannot keep ducking the question of how they are going to cope with the economic reality of Brexit.

"These are not small numbers - £25 billion is double what we spend on policing each year. Cuts of this size mean hitting schools, the NHS and public services up and down the country.

"The Chancellor has said the country didn't vote to become poorer - he now has to explain how he is going to make that expectation a reality."

Labour MP Pat McFadden, commenting for the Open Britain group which campaigns for the closest possible ties with the EU, said: "There will be some who dismiss the warnings from the IFS because they come from 'experts' but the IFS remains one of the most authoritative economic voices in the country and their warnings should be taken very seriously.

"The Leave campaign promised a rosy economic future where everything could be paid for from our EU contribution. These figures paint a very different story. It is critical that those on the lowest incomes do not pay the economic price for Brexit.

"These warnings from the IFS underline how important it is for the UK not to damage the trading position it currently enjoys through membership of the single market with both the market access and the attraction to inward investors which that represents."

A Treasury spokeswoman 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."