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Philip Hammond has been warned that he is gambling with the future health of the UK’s public finances after handing out tax cuts to the rich while finding extra money for the NHS by increasing national borrowing.
In a stinging verdict on the chancellor’s budget, which Hammond had used to claim that austerity was ending and is set to be the last before Brexit, the Institute for Fiscal Studies said he had been lucky to receive better short-term news for the government’s coffers that could quickly evaporate.
Britain’s leading tax and spending thinktank said there was a one in three chance that Britain’s finances would deteriorate significantly next year, adding that the decisions taken at the budget on Monday could lead to an increase in the national debt in the long run.
Paul Johnson, the director of the IFS, suggested that the chancellor had ducked the decision to make major tax changes to fund the £20bn in additional funds promised for the NHS by 2023-24, due to the Conservatives’ narrow majority in parliament.
Warning that Monday’s budget was simply a “sticking plaster” that would need to be addressed with “inevitable” tax rises in future, 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.”
Johnson added that the budget suggested “no great focus” on eliminating the deficit in the public finances by the 2020s, adding: “Given where they are politically, I don’t think that’s terribly surprising.”
The IFS badysis came as the Resolution Foundation argued that income tax cuts for millions of workers announced at the budget would “overwhelmingly benefit richer households”, with almost half set to go to the top 10%.
Despite the chancellor reiterating Theresa May’s promise made at the Tory conference that austerity was going to end, the Resolution Foundation found that welfare cuts would continue to have a damaging affect on the poorest households.
The overall package of tax and benefit changes announced since 2015 will deliver an average gain of £390 for the richest fifth of households in 2023-24, the thinktank found, compared with an average loss of £400 for the poorest fifth.
Three-quarters of the £12bn in welfare cuts announced after the 2015 election remain government policy. The IFS warned that the poorest had suffered the greatest damage from the cuts and that about £4bn of cuts were still to come.
Despite the increase in funding for the health service, the IFS said the budget did not represent an immediate end to austerity, which it argued was likely to persist for many government departments.
Although the £20bn in extra money for the NHS by 2023-24 represents a substantial increase in spending on the health service, it will come less quickly than average over its 70-year lifespan.
Total spending outside protected government departments, such as transport, police and prisons, is essentially flat, while the IFS said funding would fall on a per-capita basis over the coming years.
Analysis from the New Economics Foundation thinktank suggested that there will be cuts of almost £3.5bn to unprotected budgets after 2020, including a loss of £520m for prisons and £220m for public health.
John McDonnell, the shadow chancellor, said that austerity was “set to continue for years, shredding essential public services like our local councils, police, and prison services”.
Hammond had been given little choice but to loosen the purse strings at the budget, after May had promised the additional funds for the NHS and an end to austerity at the Conservative party conference earlier this month.
The chancellor was handed additional room for manoeuvre after the government’s economic forecaster, the Office for Budget Responsibility, said that the budget deficit would be about £12bn lower this year than it had previously thought.
Britain is on track to borrow about £25bn in 2018-19, compared with a previous forecast made by the OBR in March for a deficit of about £37bn, which the chancellor then opted to spend entirely on the NHS and other measures he outlined at the budget on Monday.
The OBR said the government would have generated a surplus of about £3.5bn in 2023-24 – eliminating the deficit – without the increase in spending on the health service and on other areas. However, the UK will instead record a deficit of about £19.8bn.
The IFS warned that this could prove unsustainable if the public finances did not hold up as expected over the coming years, which could become a reality if, for example, the UK crashes out of the EU without a deal. It also said that if the government continually used better-than-expected news from the public finances to fund short-term giveaways, the national debt would stick at its elevated levels.
Johnson said that, in the event that the public finances did deteriorate, Hammond had probably “painted himself into a corner”, which meant that he would “probably allow borrowing to persist at a higher level” given the political difficulty of imposing tough new spending cuts.
He added: “He has increased planned spending and maintained expected borrowing. Keep doing that and the deficit can only go one way.”
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