Austerity will be extended 'well into the 2020s', think tank warns

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The UK tax burden is set to rise to its highest level for 30 years under Chancellor Philip Hammond's plans, despite continuing cuts in public services, according to an influential economic think tank.

And the austerity regime of tax rises and spending cuts is set to continue well into the 2020s, thanks to Mr Hammond's decision in the wake of the Brexit vote to scrap George Osborne's target of balancing the nation's books by 2019, said the Institute for Fiscal Studies.

Even with a relatively soft Brexit, featuring a lengthy transition period to a free trade agreement with the EU, the UK's economy is likely to be 3% smaller by 2030 than if Britain had voted Remain, according to forecasts in the IFS's annual Green Budget.

The outcome is "likely to be worse still" if Theresa May fails to secure a trade deal.

Forecasts by Oxford Economics put UK GDP growth at a "relatively disappointing" 1.6% in 2017 and 1.3% in 2018, largely due to higher inflation caused by sterling's collapse after the Brexit vote.

Real-terms earnings growth could slow to 0.2% in 2017 from 1.7% in 2016, while the four-year squeeze on benefit levels will become "more painful" as inflation rises.

Any GDP boost from higher exports due to the weaker pound is likely to be outweighed by its negative impact on consumer spending.

Mr Hammond's plans envisage £17 billion of tax rises over the course of this Parliament, bringing the proportion of national income taken by the state above 37% for the first time since 1986/87, said the IFS.

Meanwhile, spending on public services has fallen by 10% since 2009/10, after taking inflation into account - already "by far" the longest and biggest fall on record.

Further cuts of 4% over the next three years are due to bring the total real-terms reduction to 13% between 2010/11 and 2019/20.

To meet his target of eliminating the deficit during the next parliament - which ends in 2025 - Mr Hammond will probably have to find a further £34 billion in tax rises and spending cuts, extending austerity "well into the 2020s", found the IFS.

Decisions inherited from Mr Osborne to protect spending on health, pensions and overseas aid mean all of these areas will enjoy higher budgets by 2020/21 than before the financial crisis of 2008.

But increases in health spending over the period 2009-20 will still fail to keep pace with population growth and ageing.

The five years from 2009/10 to 2014/15 saw the slowest growth rate in health spending since comparable records began in the mid-1950s, and the pace is not set to rise over the following five years, warned the IFS.

Meanwhile, spending on adult social care has fallen by more than 6% since 2009/10 and "seems likely to continue falling", at a time when the elderly population has risen by nearly 16%. 

Protection for favoured services means other departments facing more brutal cuts, with justice, business, culture and environment losing 40% of their budgets over 10 years of Conservative-led governments and spending on schools, defence, public order and safety lower in 2020/21 than before the 2008 crash, as a share of national income.

Even after the pain inflicted by years of austerity policies, the UK's total national debt remains at its highest level as a fraction of national income since 1965/66, said the IFS.

The annual deficit remains the fourth-highest of 28 advanced economies.

Mr Hammond faces a "more than one-in-three chance" of missing his target of keeping the structural deficit below 2% of national income in 2020/21, despite it being a "much easier" goal than those set by Mr Osborne.

The IFS found efforts to reduce spending on disability and incapacity benefits have delivered "much lower" savings than ministers hoped.

Spending on incapacity benefits was £15 billion in 2015/16 - 45% higher than forecast.