Austerity key to eliminate UK’s deficit
CHANCELLOR of the Exchequer Philip Hammond will need to maintain austerity if he is to achieve his aim of eliminating Britain’s budget deficit in the next parliamentary term, as Brexit creates “unprecedented” economic uncertainty, according to the Institute for Fiscal Studies (IFS).
Erasing the budget deficit after 2020, later than the goal set by Hammond’s predecessor George Osborne, will still require spending cuts and tax increases of as much as £34 billion (R563.82bn), the research group said yesterday.
Highest level
Britain’s plan to exit the EU could add to this figure, according to the IFS, which estimated that tax as a share of national income would rise to its highest level in 30 years.
While Britain’s economy has so far shown resilience since June’s Brexit referendum, a weaker pound is pushing up inflation, dimming the outlook for growth in the next two years, according to Oxford Economics, which collaborated with the IFS on the report. Official forecasts suggest Brexit will take a heavy toll on public finances in coming years.
“The new chancellor may not find it all that easy to meet his target of eliminating the budget deficit in the next parliament,” said IFS Director Paul Johnson. “If the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”
Hammond is seeking to reduce the structural deficit to no more than 2 percent of national income in 2020 to 2021, a much easier target than Osborne’s goal of balancing the books by the end of the decade. Still, the IFS estimates he has a one-in-three chance of missing even this looser goal.
The IFS also warned that pressure on health and social-care spending may add to the risks facing the public finances, as services come under pressure from a growing and ageing population.
With inflation set to erode real incomes, Oxford Economics sees gross domestic product growth slowing to 1.6 percent in 2017 and 1.3 percent in 2018. Britain leaving the single market and the customs union could reduce output by 3 percent by 2030, its UK economist Andrew Goodwin estimates, although agreeing a transitional arrangement with the EU while making progress on a free-trade agreement may mean Brexit has a “modest” impact until 2021.
“With spending power set to come under significant pressure from higher inflation and the welfare squeeze, the consumer will not be able to keep contributing more than its fair share,” Goodwin said. – Bloomberg