Philip Hammond urged to revise his target date for eliminating the deficit
Chancellor Philip Hammond may have to abandon his goal for eliminating the deficit if he wants to find extra cash for public services in next month's Budget, a leading economic think tank has warned.
The Institute for Fiscal Studies (IFS) said Mr Hammond's Commons statement on November 22 may be the moment he has to admit it is "no longer sensible" to aim to balance the books by his target date of the mid-2020s.
Such a concession would be another bitter political blow for the Conservatives, who have repeatedly put back the date since George Osborne first set out the goal of getting the public finances back in surplus within five years when they formed the coalition with the Liberal Democrats in 2010.
The IFS said that while forecast borrowing had come down slightly since the time of the last Budget in March, the impact on the public finances was likely to be "dwarfed" by downgrades to the Office for Budget Responsibility's (OBR) estimates for productivity growth in the face of the UK's continued sluggish performance.
If the OBR were to cut its current forecast for productivity growth from 1.6% a year to 1%, the IFS said it would add almost £20 billion to the deficit by 2021-22, taking it from a predicted £17 billion to almost £36 billion.
However, if the OBR assumed that the "terrible" productivity growth rate of the last seven years of just 0.4% were to continue, the projected deficit would rise to £70 billion.
At the same time, Mr Hammond is under intense political pressure to come up with additional funding for public services, particularly the NHS, while easing the public sector pay cap.
IFS deputy director Carl Emmerson said: "Public sector workers, the NHS, the prison service, schools and working-age benefit recipients, among others, would like more money.
"Given all the current pressures and uncertainties, and the policy action that these might require, it is perhaps time to admit that a firm commitment to running a budget surplus from the mid-2020s onwards is no longer sensible."
For Labour, shadow chancellor John McDonnell said the IFS analysis showed Tory economic policies had failed and that it was time for a change of direction.
"The IFS have today confirmed seven years of Tory austerity policies have failed to drive up investment and productivity, with serious potential consequences for the public finances," he said.
"Instead of dragging millions of ordinary people through the endless misery of Tory spending cuts, the Chancellor now needs to make a decisive break with past Tory failure and end austerity."
The Treasury said ministers would continue to adopt a "balanced approach" to "repairing" the public finances.
"We have made good progress in reducing our borrowing, thanks to our clear fiscal targets, but our national debt is still far too high at almost £65,000 for every household," a spokesman said.
"We will continue to take a balanced approach, dealing with our debts while also investing in our public services, to build an economy that works for everyone."