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The government will need to find up to £ 27 billion in spending cuts or tax increases by 2024 to put public finances on a sustainable footing, the Treasury spending regulator warned.
In a forecast for public finances that predicted lasting damage to the economy in the aftermath of the Covid-19 crisis, the Office of Budget Responsibility (OBR) said the spending gap based on its most likely estimate was unlikely to be filled with stronger economic growth. , leaving ministers to make tough decisions for years to come.
Richard Hughes, chairman of the OBR, said in a report released after the spending review that additional measures announced by the chancellor since July totaling £ 86bn this year and £ 40bn next year had saved the economy of being “materially weaker”.
Loan Chart
He said the extension of the licensing scheme through next March had likely saved some 300,000 jobs and preserved significant levels of income taxes, while additional funding for the NHS and local authorities to deal with the health crisis had saved many lives.
Rishi Sunak had also narrowed the gap in public spending starting next year following a planned £ 10bn cut in departmental spending that he expects to be repeated in subsequent years while aiming for a near zero reduction in spending. of Covid-19 as of 2022.
Debt graph
However, Britain’s debt-to-GDP ratio, which measures the gap between annual national income and the deficit, is on track to reach 108% in the next financial year and peak at 109.4% in 2022- 2. 3.
The annual deficit will increase this year by £ 394bn or 19% of GDP before falling to £ 100bn by 2024, leaving the UK with a 5% annual deficit.
Hughes said it would be difficult to reduce the deficit later in the decade as pressure on the health care and pension systems of an aging population increased, although borrowing costs remained at historically low levels.
Coronavirus costs
Paul Johnson, director of the Institute for Fiscal Studies, said the plans, along with the goal to reverse a Covid-linked increase in universal credit next April, would be difficult to carry out and “questionable.”
“It seems more likely that spending will end up being significantly higher than stated today, so loans in 2024-25 will be considerably more than the £ 100bn forecast by the OBR,” he said.
“Either that or we’re in for some pretty austere years once again, or some big tax increases.
Unemployment chart
Torsten Bell, Director of the Resolution Foundation, said: “The idea that there will be no permanent increase in spending after the pandemic is what could be politely called optimistic.
“It is true that tax increases will end up playing a larger role in any real plan to put public finances on a sustainable footing once the recovery is assured,” he added.
The OBR said there were several elements of the current crisis that made it difficult to determine whether the government would lose some of its revenue temporarily or whether the economic damage was such that the coup would make it more durable.
Hughes, who set three scenarios for the next five years, from optimistic to pessimistic, said the recovery remained uncertain and depended on the success of the current lockdown, the reaction to the staggered restrictions next month and how effective vaccines will be and when. it will be available to everyone.
He said a new estimate of the impact of a breakdown in trade talks with the EU had shown that a no-deal Brexit would cut GDP growth by 2% and cost the treasury £ 10bn more than if the government reached a agreement.
GDP graphs
The loss of trade would only be partially offset by an increase in tariffs on imported goods, the OBR said, leaving the economy and public finances worse off without a deal.
Mel Stride, chairman of the all-party treasury select committee, said the chancellor could comfortably delay tough decisions until economic recovery is in full swing.
He said most Conservative MPs recognized that additional spending to rescue the economy and get it running again was essential before starting to consider tax increases or spending cuts.
“I don’t think there is pressure to cut too soon because there is a general acceptance that these decisions will have to wait. That said, if the OBR is correct, there will be a considerable gap to close, ”he said.
Capital Economics said the OBR was probably being too pessimistic. Ruth Gregory, an economist at the UK consultancy, said: “It is not necessarily true that there will be a fiscal hole anyway if the economy eventually returns to its pre-virus level, as we believe.
“The economy would be around 1% smaller in 2024-25 compared to if the pandemic had never happened. That is closer to the bullish scenario for the OBR.
“Additionally, we expect the economy to return to its pre-virus trend later in the decade. And low borrowing costs mean that the government can take time to allow economic growth to fill the gap, “he added.
