Boris Johnson’s plans to increase public spending and cut taxes leave “very little scope” for meeting the Conservatives’ pledge to reduce the national debt, the Institute for Fiscal Studies (IFS) has said.
In a warning to both the Tories and Labour, the IFS said: “Debt cannot go on rising forever.” Both main parties have ripped up recent economic orthodoxy that said spending should be limited and promised a splurge on public services.
The IFS’s intervention came amid fears that the public finances would not face proper scrutiny after chancellor Sajid Javid scrapped his Budget, which was planned for today, due to the Brexit extension and General Election.
The official budget watchdog, the Office for Budget Responsibility (OBR), will tomorrow publish an updated version of its March forecast to give the public an idea of the health of the public finances, despite such a report normally accompanying a Budget.
Marking the occasion of the now-scrapped Budget, the IFS repeated repeated its charge that the UK is set to break one of its spending rules, with the budget deficit likely to rise above two per cent of GDP next year.
One reason for this is a change in the way the official statistics body accounts for student debt, public pensions and corporation tax receipts which would likely push borrowing up by almost £20bn a year over the next five years.
Another is that Javid’s September spending round promised “a substantial £13bn boost” to spending next year, “with no attempt to finance these from higher taxes or cuts elsewhere,” the IFS said.
The Labour party would be even more profligate, however, having promised spending splurges on free university education, nationalisations and a major investment drive. Labour would also be likely to break their 2017 rule to “make sure government debt is falling at the end of five years”.
Addressing both parties’ pledges to spend billions on public services and investment, it said: “There is very little scope for both offering net giveaways and being on course to have debt lower at the end of the next parliament than it is today.”
This means the Conservatives would be set to break the rule laid down by ex-chancellor Philip Hammond that says the stock of national debt should be falling as a share of national income.
The IFS again took aim at Johnson’s pledges to lower taxes, saying: “Given the government’s desire to spend more we argued that this is not the time to be implementing substantial and permanent net tax cuts.”
Yet Syed Kamall of the free-market Institute for Economic Affairs (IEA) said the IFS did not consider “the potential dynamic effect of tax cuts”. The IEA argues tax cuts can increase revenues for the Treasury by boosting the economy.
The Bank of England will also produce its quarterly report into the health of the economy tomorrow. It could downgrade its growth forecast for the year after the UK economy contracted in the second quarter.
(Image credit: Getty)