Think-tank says deficit target will be sacrificed if public services grow

CHANCELLOR PHILIP Hammond may have to abandon his goal for eliminating the deficit if he wants to find extra cash for public services in next month’s Budget, a leading independent economic think-tank has warned.

The Institute for Fiscal Studies (IFS) said Mr Hammond’s Commons statement on November 22 might be the moment he has to admit it is “no longer sensible” to aim to balance the books by his target date of the mid-2020s.

Such a concession would be another bitter political blow for the Conservatives, who have repeatedly put back the date since George Osborne first set out the goal of getting the public finances back in surplus within five years when they formed the coalition with the Liberal Democrats in 2010.

The IFS said that while forecast borrowing had come down slightly since the time of the last Budget in March, the impact on the public finances was likely to be “dwarfed” by downgrades to the Office for Budget Responsibility’s (OBR) estimates for productivity growth in the face of the UK’s continued sluggish performance. If the OBR were to cut its current forecast for productivity growth from 1.6 per cent a year to one per cent, the IFS said it would add almost £20bn to the deficit by 2021-22, taking it from a predicted £17bn to almost £36bn.

However, if the OBR assumed that the “terrible” productivity growth rate of the last seven years of just 0.4 per cent were to continue, the projected deficit would rise to £70bn.

At the same time, Mr Hammond is under intense political pressure to come up with additional funding for public services, particularly for the health service, while easing the public-sector pay cap.