Rishi Sunak will have to raise taxes, bend his fiscal rules or do both if he wants to meet public expectations of an end to austerity, according to a report by the Resolution Foundation.
The think-tank said the chancellor would otherwise have no leeway to increase day-to-day spending on public services, even if he benefited from a modest improvement in the outlook for the public finances and pushed back the date at which the government aims to balance the current budget.
In an analysis published ahead of next month’s Budget, the Resolution Foundation predicted that the Office for Budget Responsibility could hand the chancellor an £8bn windfall in the form of an improved outlook for the public finances in 2022-23. The watchdog’s new forecasts could prove better than many expect, the think-tank argued, because a weaker outlook for GDP growth would be offset by a stronger labour market, and by lower interest rates and inflation bringing down the cost of servicing government debt.
But even after this upgrade, Mr Sunak would have only £10bn of headroom before breaching a manifesto pledge to eliminate the deficit on day-to-day spending by 2022-23, the Resolution Foundation estimates. Were Mr Sunak to push back the deadline by two years, an option Number 10 has hinted at, he would still only have headroom of £15bn — well within the range of forecasting error, the think-tank said.
£24bn
Additional sum needed were ministers to reverse half the cuts to per capita spending since 2010 in non-health departmental spending
“Welcome fiscal news will not remove the need for the chancellor to make difficult choices . . . [between] spending increases, low taxes and fiscal credibility. Something (or a bit of each of these commitments) will have to give,” the report said.
“That headroom is the absolute minimum . . . he definitely shouldn’t be using that headroom to pay for [spending] increases,” said Torsten Bell, the Resolution Foundation’s director.
The think-tank argues that the Budget will be the start of a three stage process — with a full review of departmental spending and a second autumn Budget later in the year — to determine the scale of the government’s ambition to “level up” underperforming regions and end austerity, and establish whether the Conservatives are willing to raise taxes in order to accommodate a bigger state.
The government has already promised an extra £100bn of capital spending for infrastructure over five years, which can be accommodated within the existing fiscal framework.
But if ministers wanted to reverse half the cuts to per capita spending made since 2010 in non-health departmental spending, they would need to spend an additional £24bn by the end of the parliament, the Resolution Foundation calculates. Fulfilling the prime minister’s pledge to end the crisis in social care would be a big additional cost, as would the £5bn extra needed to mitigate previous welfare cuts.
“New roads and rail lines are only part of the story for a government wishing to turn the corner on a decade of austerity,” said Jack Leslie, an economist at the Resolution Foundation. “If the chancellor wants to increase spending on day-to-day public services in a fiscally responsible way he will have to change another of his party’s traditional priorities: lower taxes.”
Mr Sunak does not necessarily have to set the spending envelope for departments, or decide on the scale of new taxes and borrowing, in next month’s Budget; he could instead consult on tax reform and defer final decisions to the autumn.
Tax measures under consideration in the Treasury and Number 10 include cuts in pension tax relief for high earners, new charges on high-value properties, and ending the freeze on fuel duty, although the latter would meet stiff opposition in the Conservatives’ newly won northern constituencies.
The Resolution Foundation argued that the government should also look at freezing the tax-free personal allowance, rather than raising it in line with inflation, to help fund one of its most expensive election pledges — the promise to raise the threshold for national insurance contributions to £12,500.
The think-tank also called on the government to consult on more fundamental reform to inheritance and council taxes, and gradually to raise more revenue from environmental taxes.
In a separate report released on Monday, the Institute for Government said departmental underspending could pose problems for Boris Johnson’s ambitions to increase capital investment.
Previous governments had consistently underspent on capital investment because the Treasury has allowed departments to divert allocated funds to day-to-day spending, the report found. Over-optimism, extended project timelines, poor staffing and lack of capacity in the construction sector have also stopped the government from winning value from its capital spending pledges.
In order to avoid such underspending the government should ensure there are enough skilled people to manage procurement and allocate sufficient funding for day-to-day expenditure, the Institute for Government said.
