‘Virtually no Brexit dividend’ to help eliminate deficit
CHANCELLOR PHILIP Hammond would have to increase taxes by £19bn – the equivalent of one penny on income tax, National Insurance and VAT – to meet Theresa May’s promise to end austerity while sticking to his plans to eliminate the deficit, a new report has found.
And the report by the Institute for Fiscal Studies said there will be “virtually no Brexit dividend” to relieve spending pressure on the Chancellor, despite Mr Hammond’s hopes of a boost if a withdrawal deal is agreed.
Even without taking into account the likely hit to tax revenues following Brexit, the Treasury can expect only a “modest” £1bn-a-year saving on EU contributions by 2022/23 – a figure which could “easily” be outweighed by additional spending on bureaucracy, such as new border guards.
Unless economic growth is much better than expected, Mr Hammond will face the choice between “substantial” tax hikes or ditching his target of balancing the books by the mid-2020s, the IFS warned in its annual Green Budget.
If the Chancellor chooses to fund the end of austerity by raising taxes by one per cent of national income, this would bring the overall tax burden close to its highest level since the end of the Second World War – though it would still be in the middle of the range for developed industrial countries.
Even £19bn of tax increases by 2022/23 would be enough only to meet existing commitments on additional funding for health, defence and aid – including the first three years of the five-year £20bn boost promised to the NHS – while halting real-terms cuts in other areas, said the respected economic think-tank. And this would still leave social security cuts totalling £7bn to work their way through the system.
The IFS warned: “Unless there are substantial tax rises, or muchbetter-than-expected economic growth, the Prime Minister’s aim of ‘ending austerity’ is unlikely to be compatible with the Chancellor’s aim of balancing the books by the mid-2020s.”
This leaves Mr Hammond with “the toughest of circles to square” in his October 29 Budget and next year’s Spending Review, said IFS director Paul Johnson.
A Treasury spokesman said: “Our balanced approach is getting debt falling and supporting our vital public services, while keeping taxes as low as possible.”