Austerity to run ‘well into the 2020s’, warns think tank

Real-terms earnings growth could slow to 0.2% in 2017 from 1.7% in 2016
Real-terms earnings growth could slow to 0.2% in 2017 from 1.7% in 2016

The UK tax burden is set to rise to its highest level for 30 years under Chancellor Philip Hammond’s plans, despite continuing cuts in public services, according to an influential economic think tank.

And the austerity regime of tax rises and spending cuts is set to continue well into the 2020s, thanks to Mr Hammond’s decision in the wake of the Brexit vote to scrap George Osborne’s target of balancing the nation’s books by 2019, said the Institute for Fiscal Studies.

Even with a relatively soft Brexit, featuring a lengthy transition period to a free trade agreement with the EU, the UK’s economy is likely to be 3% smaller by 2030 than if Britain had voted Remain, according to forecasts in the IFS’s annual Green Budget.

The outcome is “likely to be worse still” if Theresa May fails to secure a trade deal.

Forecasts by Oxford Economics put UK GDP growth at a “relatively disappointing” 1.6% in 2017 and 1.3% in 2018, largely due to higher inflation caused by sterling’s collapse after the Brexit vote.

Real-terms earnings growth could slow to 0.2% in 2017 from 1.7% in 2016, while the four-year squeeze on benefit levels will become “more painful” as inflation rises.

Any GDP boost from higher exports due to the weaker pound is likely to be outweighed by its negative impact on consumer spending.

Mr Hammond’s plans envisage £17bn of tax rises over the course of this Parliament, bringing the proportion of national income taken by the state above 37% for the first time since 1986/87, said the IFS.

Meanwhile, spending on public services has fallen by 10% since 2009/10, after taking inflation into account - already “by far” the longest and biggest fall on record.

Further cuts of 4% over the next three years are due to bring the total real-terms reduction to 13% between 2010/11 and 2019/20.

To meet his target of eliminating the deficit during the next parliament - which ends in 2025 - Mr Hammond will probably have to find a further £34bn in tax rises and spending cuts, extending austerity “well into the 2020s”, the IFS said.