IFS says the Chancellor is on track to impose a package of manifesto-busting tax increases at this month’s budget.
Despite planning for the biggest tax raid in a generation, Rishi Sunak is poised to usher in cuts worth £2bn for government departments tasked with meeting the Tories’ flagship “leveling up” agenda.
With a package of manifesto-busting tax increases at this month’s budget and spending review, the chancellor was on track to lift the United Kingdom’s tax burden to the highest sustained level in peacetime, according to The Institute for Fiscal Studies (IFS).
Despite having the tax raid, which would help fund an expansion in the state to the highest level of government spending since 1985, several Whitehall departments would still face budget cuts, as explained by the leading independent thinktank for the public finances.
The IFS, in an intervention ahead of Sunak’s landmark post-lockdown budget due later this month, said that perennially squeezed areas such as local government, further education, prisons, and courts could have their budgets cut by more than £2bn next year. It stated:
“These budgets were cut substantially in the 2010s, and a further round of cuts would be difficult to reconcile with the government’s stated objectives – particularly around ‘leveling up’.”
The overall government spending was on track to settle at 42% of national income, about 2% higher than before the pandemic, the think tank said, in its “green budget” assessment of the public finances, issued with economic forecasts from the investment bank Citi.
Despite voluble Tory promises about leveling up and ending austerity, less was being left over for other areas of Whitehall spending, while the pressures from an aging population meant a growing share was going towards health, it warned.
It also added that Sunak was on track, without a substantial shift in direction, to raise spending on public services other than health, defense, schools, and overseas aid by less than was planned before the spread of the coronavirus in 2021.
The IFS said tax rises announced by the government were effectively being “smuggled in” under the cover of the pandemic, against a backdrop of rising living costs amid an unfolding autumn energy crisis.
Prime Minister Boris Johnson gave the green light to a manifesto-busting national insurance hike to fund health and social care last month, while Sunak announced plans earlier this year to raise corporation tax by 2023, reversing decades of Tory orthodoxy for lower taxes and state intervention.
Last week, in a centerpiece speech to party members at the Conservative conference in Manchester, the chancellor painted himself as a low-tax Thatcherite, saying he would prioritize balancing the books.
Offering the chancellor wiggle room before the budget, the IFS said he was likely to benefit from a £50bn boost for the public finances this year compared with official forecasts made in March 2021.
The deficit — the shortfall between state spending and income –is expected to come in at about £180bn for the current financial year, significantly below the Office for Budget Responsibility’s spring forecast for borrowing of almost £240bn.
Speculation has been rising among senior Tories that before the next general election, scheduled for 2024, Sunak could build up the headroom for a package of tax cuts should the British economy continue on its stronger-than-expected recovery from Covid.
The IFS said that the public borrowing coming in at about £20bn lower than forecast by the OBR in March by the end of the parliament could benefit the chancellor, with the government finances set to return to a surplus for day-to-day spending by 2023-24.
As pressures on health and social care spending kept increasing, the IFS warned that there was still heightened uncertainty over the long term impact Covid-19 would have on the economy and public finances.
The UK economy would be between 2% and 3% smaller in 2024-25 than before the pandemic, with Brexit causing a deeper scarring effect than Covid, according to analysis estimates from Citi. Christian Schulz, the bank’s director of European economics, stated:
“The scarring just because of the pandemic may not be as large as we thought last year. The scarring due to Brexit may actually be larger. Brexit is casting a long shadow over the economy.”
The IFS said that the government, under the most optimistic scenario, could reap the biggest current budget surplus since 1972; while under the most pessimistic, planned tax increases would need to be tripled to reach the same outcome. Paul Johnson, director of the IFS, said:
“[Sunak] still faces huge uncertainty over the direction of the economy and hence over the state of the public finances. He will be hoping against hope that stronger-than-expected growth in revenues over the next few years will help to dig him out of what still looks like a fair-sized hole.”
The government would continue to invest in the public’s key priorities, as mentioned by a spokesman for the Treasury.
“Core departmental spending will grow in real terms over this parliament at nearly 4% per year on average – a £140bn cash increase and the largest real-terms increase in overall departmental spending for any parliament this century.”