Fresh analysis that reveals a hole of almost £20bn in the public finances will heighten the pressure on the chancellor, Philip Hammond, ahead of next month’s budget.
Britain is on track for the deficit – the gap between government spending and tax receipts – to reach £36bn by 2021-22, more than twice the initial official forecast of £17bn, according to the Institute for Fiscal Studies (IFS).
The stark analysis adds to pressure on the chancellor as he appears increasingly trapped between the government’s fiscal targets and calls to raise spending as the economy deteriorates and uncertainty over Brexit persists. He is due to deliver his budget on 22 November.
“It is hard to see how the chancellor can both maintain the credibility of his fiscal targets and respond effectively to the growing demands for spending”, the IFS said.
At the root of the problem for Hammond is an admission by the government’s official economic forecaster that weak levels of productivity since the financial crisis are unlikely to improve any time soon. The Office for Budget Responsibility (OBR) has said it will need to significantly lower its estimates for the economic output per hour worked in Britain.
Treasury officials are understood to have known about the impact of the revision on the public finances for some time. The OBR has said it views the 0.2% rate of productivity growth over the past five years as a better guide for 2017 than its forecast of 1.6% in March.
Were it to decide the low productivity growth of the last seven years – at about 0.4% a year – is normal for Britain, borrowing could rise to almost £70bn in 2021-22, according to the IFS. Downgrading the growth rate to about 1% a year would put the deficit on course to be almost £20bn higher over the same time period.
The changes make it harder for Hammond to raise public sector pay – as demanded by unions and conceded as a priority by Theresa May for prison and police officers – without breaking his pledge to get the public finances back into surplus by the mid-2020s.
This would most likely be the case even with a further £15bn in aggregate spending cuts already pencilled in for the years to 2021-22, which are due to come on top of a fall of about £46bn in spending since 2010, according to the IFS. The projected cuts include removing £12bn in benefits for working-age families, on top of £29bn implemented in the past seven years.
Carl Emmerson, the IFS’s deputy director, said: “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.”
An admission that austerity is no longer working would come as a major blow to the Conservative party after seven years of dogmatic fiscal rectitude. The Tories have repeatedly dismissed Labour calls to raise public spending as a means to boost the economy, while Theresa May has compared Jeremy Corbyn’s plans for the economy to the policies of Venezuela.
The communities secretary, Sajid Javid, however, has recently said the government should borrow more money to invest heavily in new homes, in a partial reversal of his party’s austerity doctrine. An admission of failure would also not be the first in recent memory, given Osborne pledged in 2010 to eliminate the deficit by 2015 before being forced to revise his targets.
British workers are feeling increasingly squeezed by negative real wage growth and rising inflation – also putting pressure on the chancellor. Brexit is adding to the weight behind calls to increase spending, as political uncertainty hits business investment and consumer confidence.
John McDonnell, the shadow chancellor, seized on the IFS report, blaming austerity for failing to drive up investment and productivity. “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,” he said.
The Treasury said it would take a balanced approach to dealing with the nation’s debts while investing in public services.