Sajid Javid is poised to break his first promise as chancellor by raising government borrowing above limits set in the Conservative manifesto, a leading thinktank has said.
The Resolution Foundation said before Javid’s spending review next week that he stood to break his fiscal rules governing how much the country should borrow by ramping up spending in the runup to Brexit.
The chancellor, in a move that has stoked intense speculation of a snap election, would use a spending round announcement on Wednesday to meet the pledges made by the prime minister, Boris Johnson, for higher spending on health, schools and police.
Although Javid promised this week to stick to the borrowing rules devised by his predecessor, Philip Hammond, the thinktank said a UK economy teetering on the brink of recession had damaged the public finances, dramatically cutting his room for manoeuvre within those constraints.
Hammond set four fiscal rules to be policed by the government’s tax and spending watchdog, the Office for Budget Responsibility, which were part of the Conservative manifesto when Theresa May was prime minister.
As the party committed to cutting the deficit – the gap between government spending and income from taxes – the rules bind Javid to keep public debt falling as a percentage of GDP and to ensure borrowing adjusted for the state of the economy is below 2% of GDP in 2020-21.
The public finances should be balanced by the middle of the next decade, while the amount spent on welfare must also remain below a specific cash limit – currently £135bn.
The Resolution Foundation, basing its figures on the most recently available forecasts on the state of the economy and the public finances made by the OBR in March, said Javid had enough room to raise spending by about £14bn in the round.
Critics have said the chancellor could avoid scrutiny by using the forecasts made earlier this year. The OBR should produce forecasts twice a year, although it would only publish its latest assessments alongside the next budget, the date of which is yet to be confirmed by Javid.
The UK economy has stalled over the summer as global growth falters and Brexit uncertainty weighs on the country, denting the strength of the public finances. Public borrowing has also gradually started rising as Whitehall departments have had to spend more money on staff wages in recent months as they stepped up hiring in preparation for leaving the EU.
The Resolution Foundation said both factors had cut Javid’s spending headroom down to about £4bn for next year.
The thinktank said the prime minister’s existing promises made since entering No 10 were worth about £6bn next year, while there are expectations for further spending announcements next week, as well as tax cuts in future that would smash apart the fiscal rules.
Economists said that the UK has room to raise spending on public services after 10 years of austerity, as government borrowing costs are at historically low levels. The government has also cut the deficit to the lowest level in 17 years.
The Resolution Foundation said the government could afford to raise its borrowing levels to boost public spending, but added that if Javid broke the fiscal rules then the UK’s international credibility would be tarnished at a time when it was already looking likely to leave the EU without a deal.
Several economists have urged the government to change its fiscal rules in recent months to reflect the need to raise spending on services hit by austerity.
Torsten Bell, the chief executive of the Resolution Foundation, said: “Next week’s spending round will mark the end of a decade of spending cuts that have dominated political and economic debates. With the deficit now at a 17-year low, the chancellor can clearly afford to borrow more to spend on public services.
“But it is far less clear that he can afford to undermine economic credibility by professing to be bound by fiscal rules that are likely to be inconsistent with the scale of spending rises and tax cuts being planned.”
