Chancellor has taken a gamble with the public finances, says thinktank

Philip Hammond has taken a “gamble” with the public finances which could lead to higher borrowing and debt in coming years, a respected economic thinktank has said.

The Institute for Fiscal Studies said that the Chancellor may have “painted himself into a corner” by using a windfall from revised borrowing forecasts to fund increased spending on the NHS.

And it warned that tax rises are “all but inevitable” in the longer run to pay for the pressure on the NHS of Britain’s ageing population.

Any expectation that Mr Hammond will now meet his target of eliminating the deficit by the mid-2020s was “for the birds”, said IFS director Paul Johnson.

Despite Mr Hammond’s claims that the economy has “turned a corner” on the way to the end of austerity, Mr Johnson said that Monday’s Budget was “no bonanza” for public services other than the NHS.

While the health service in England is set to enjoy £20.5 billion higher spending by 2023/24, spending on most other departments will be “essentially flat” over the coming five years once inflation is taken into account, said Mr Johnson.

On a narrow definition, Mr Hammond’s package could be seen as an “end to austerity, said Mr Johnson.

But he added: “On wider definitions, it doesn’t, at least not yet.”

Looking at the impact of the package on the public sector, he said: “This is no bonanza. Many public services are going to feel squeezed for some time to come. Cuts are not about to be reversed.

“If I were a prison governor, a local authority chief executive or a headteacher I would struggle to find much to celebrate. I would be preparing for more difficult years ahead.”

Mr Johnson said that the rise in income tax thresholds announced by Mr Hammond would benefit the wealthy more than those less well-off, with a typical higher rate taxpayer gaining £176 a year and a basic rate payer gaining just £24.

And he said that, even after the injection of around £2 billion a year into Universal Credit, there would be “millions of losers” from the introduction of the new benefit.

The Chancellor’s move to reverse previous cuts to UC was “a small increase in generosity compared to the cuts to working age benefits introduced since 2015 and small relative to cuts still to come,” said Mr Johnson.

As UC is rolled out, around one-third of benefit claimants will end up £1,000 or more worse-off and one-third at least £1,000 a year better-off than they would have been under the previous system.

Mr Johnson said that Mr Hammond had chosen to take advantage of last-minute improvements to borrowing forecasts by the Office for Budget Responsibility (OBR) to fund increased spending on the NHS promised by Theresa May earlier this year.

“Now we know,” he said. “When push comes to shove, it’s not tax rises and it’s not the NHS that Mr Hammond is willing to gamble on, it’s the public finances.

“Because yesterday’s Budget was a bit of a gamble.

“Yes, the OBR reduced borrowing forecasts so he was able to find more money without committing to more borrowing.

“But what the OBR gives the OBR can take away. Suppose the public finance forecasts deteriorate significantly next year? They might. There’s perhaps a one in three chance of that. What will he do then?”

If the OBR downgrades forecasts in the coming years, Mr Hammond will have “have painted himself into a bit of a corner”, said Mr Johnson.

“He’s going to struggle to reimpose austerity having announced its end. Could he resort to sizeable tax rises? More likely he would just allow borrowing to persist at a higher level.”

Although spending on the NHS will rise “substantially” as a result of the “big upward revision” to overall spending plans announced by the Chancellor on Monday, the rate of improvement will be “nothing particularly historic”, remaining lower than the average over the health service’s 70-year history, said Mr Johnson.

Meanwhile, spending outside the protected areas of health, defence and aid looks set to rise only in line with inflation – and will fall on a per capita basis.

Total spending will rise in real terms – when inflation is taken into account – but fall slightly as a fraction of national income. Total day-to-day spending in the public services remains 8% lower than in 2009/10 and will still not have reached that level by 2023/24.

And the growth in spending on the NHS at a time when other departments are receiving no such boost means that health will reach 38% of total spending on the public services by 2023/24, compared to 23% in 2000 and 29% in 2010.

“At some point, we will need to pay more tax if we are to continue to increase spending on the NHS like this,” Mr Johnson warned.

The IFS director described other tax changes introduced by the Chancellor – including a digital service tax on online giants and a cut in business rates for small retailers – as “a short-term sticking plaster solution to some big underlying problems with the tax system”.