Up to £40bn in tax rises needed to balance UK books

IFS chief Paul Johnson
IFS chief Paul Johnson

Tax rises worth at least £30 billion a year -and possibly £10m more - will be required if the Government is to protect public spending and balance the books by the middle of the next decade, a respected economic think tank has said.

Chancellor Philip Hammond used his spring statement to hint he will turn on the spending tap in this autumn’s Budget after positive public finance figures pointed to “light at the end of the tunnel” following years of austerity.

But in its analysis of the economic challenges facing the country, the Institute for Fiscal Studies painted a bleak image.

Responding to Mr Hammond’s new-found optimism, IFS chief Paul Johnson said: “Growth remains depressed, among the worst in the G20.

“And given the uncertainties around Brexit there remains plenty of risk on the downside.”

He said public debt is “not really due to fall” and Mr Hammond should be “especially cautious about opening the spending taps”.

But pressures on public services are “undeniable” with many struggling in ways they were not two or three years ago.

Just to avoid spending falling as a fraction of national income beyond 2019-20, Mr Hammond would need to find an additional £14bn a year relative to current plans by 2022-23.

However, if the Chancellor wants to eliminate the deficit by the mid-2020s he would need to fund an additional £18bn through tax increases or spending cuts by then.

“Put these two together and on current forecasts just keeping spending constant as a fraction of national income beyond 2019-20 and reaching budget balance by the mid-2020s would require tax rises of £30bn a year,” Mr Johnson said.

“And that’s before additional demographic pressures which could add another £11bn a year to the money the Government would need to find from somewhere in 2025 if it wants to cover the additional demands for health, pension and social care spending.”

He said the consequences of the economic crash in 2008 meant the economy was £300 billion smaller than had been forecast before the crisis - and the effects are lingering.

“Dismal productivity growth, dismal earning growth and dismal economic growth are not just part of the history of the last decade, they appear to be the new normal,” he said.