Philip Hammond faces another £20bn hole in his deficit reduction plans, as the chancellor comes under political pressure to increase spending in the forthcoming Budget.
Analysis by the influential Institute for Fiscal Studies (IFS), published today, shows that a productivity forecast downgrade from the government’s Budget watchdog may leave the total deficit as high as £36bn by 2021-22, before any extra spending commitments.
Hammond is currently committed to eliminating the deficit – the shortfall in government spending funded by borrowing – by 2025.
Yet he is currently facing calls from Labour, as well as some Tory MPs, to loosen his approach to austerity. Just last week, Hammond rejected pleas from the communities secretary, Sajid Javid, to borrow billions for infrastructure and housebuilding.
The Budget on 22 November may also include new revenue-raising measures. One option floated by the Treasury is a clampdown on companies using self-employed contractors, rather than employees, to avoid paying national insurance.
Such a move could affect firms ranging from multinational behemoths like BP to tiny businesses with three employees, according to Jonathan Riley, head of tax at accountants Grant Thornton, as well as hitting professionals who are paid through personal service companies.
With Theresa May’s government struggling to regain the initiative following its disastrous election result in the summer, the IFS warns that the credibility of Hammond’s fiscal targets is under threat.
“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,” said Carl Emmerson, deputy director at the IFS.
Abandoning the targets is not politically viable for the chancellor, so he may be forced to continue austerity, according to Kallum Pickering, senior UK economist at Berenberg bank.
“If he [Hammond] were to meet his near-term targets it would be at the expense of near-term growth,” said Pickering.
While borrowing this year has been significantly lower than official March Budget forecasts, the lack of projected improvement in the amount Britons produce per hour means the tax take will likely remain stagnant.
If the Office for Budget Responsibility cuts its productivity assumptions to match growth over the last seven years, borrowing could rise to almost £70bn per year by 2021, the IFS said.
The Budget squeeze coupled with uncertainties around Brexit will tie the hands of the chancellor, said Riley. He said: “This is going to be a Budget that will be low on big measures.”
However, Matthew Whittaker, chief economist at the Resolution Foundation think tank, said: “The OBR’s productivity downgrade is undeniably bad news for Philip Hammond, but I think he still has space to deliver a Budget that contains some fresh spending designed to support the economy and appeal to voters.”
A Treasury spokesperson stressed the government’s commitment to cutting the deficit, saying: “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.
“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.”