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UK needs £15bn in cuts or tax rises to clear deficit by 2022, says IFS

Tory austerity drive has made little difference to public spending as a share of national income, leading thinktank finds

It will take an extra £15bn of spending cuts or tax rises to eliminate the budget deficit by the time of the 2022 election, a leading thinktank has said as it laid bare the damaging legacy of the financial crisison UK living standards and public finances.

The Institute for Fiscal Studies said that despite “two parliaments of pain”, the Conservative-led austerity drive had made little difference to public spending when measured as a share of national income and compared with pre-downturn levels.

Publishing its analysis as political parties prepare to set out their manifestos for the snap election on 8 June, the IFS said the deficit had fallen considerably since its peak in 2009–10. But the gap between public spending and income was still one of the biggest among advanced economies, it added.

The thinktank found that while tax revenues had improved and were forecast to continue growing, there had also been a rise in public spending against the backdrop of a long and sluggish economic recovery.

“The deficit is now roughly back to the level it was prior to the financial crisis, although is still above its long-run average. On the tax side, the impact on the public finances of substantial tax cuts has been more than outweighed by tax raising measures,” said Carl Emmerson, deputy director of the IFS and author of the report.

“On the spending side, seven years of austerity has seen significant cuts to areas such as working-age benefits and public order and safety. But despite this, overall public spending remains slightly above its pre-crisis share of the economy.

“This is due to persistently poor economic growth and an increase in the share of national income devoted to health, pensioner benefits and overseas aid.”

The financial crisis that began with a credit crunch in 2007 and escalated to the bailout of banks and a recession had led to a sharp reduction in national income for the UK, Emmerson’s analysis showed. “Even more striking is the weakness of the subsequent recovery,” he said, noting GDP per adult only returned to its pre-crisis level around the end of 2015.

Alluding to more than a decade of lost growth, Emmerson found that by 2022 GDP per adult would be 18% lower than it would have been had the economy grown by 2% a year since 2008 – broadly the expected rate of growth at that time.

“This downgrade in expected income has adversely affected the finances of households and of the government,” said Emmerson.

His analysis found that in addition to plans already set out, the next government would have to find more savings and more revenues if it wanted to eliminate the deficit before a May 2022 general election.

The Conservatives have repeatedly vowed to cut the deficit, which is the gap between what the government receives in tax and other revenues and what it spends on public services, benefits and other areas. In a small boost for the chancellor, Philip Hammond, figures for the last tax year showed the deficit had shrunk by 28% on the previous year to the lowest gap since 2007-08.

But some economists have questioned the merits of focusing on eliminating the deficit, arguing that an austerity drive since the crisis has been counter-productive because it dented already lacklustre growth, raised welfare costs and squeezed incomes.
“There is nothing special in eradicating the deficit – it is a completely arbitrary goal,” said Simon Wren-Lewis, economics professor at Oxford University.
He added that how quickly a government chooses to cut the deficit and bring down the stock of national debt was a political choice.
“The only clear message from economics is that adjustment in the debt to GDP ratio should be fairly slow to avoid sharp decreases in spending or large increases in taxes,” Wren-Lewis said.

The IFS said the UK still had the fifth largest deficit out of 35 advanced economies in 2016 as a share of GDP, behind Spain, the US, Japan and France. The UK’s national debt was the sixth highest.

“The latest forecasts suggest the deficit will fall over the next five years. But even had the next parliament run from May 2020 to May 2025 eliminating the deficit would have been far from straightforward” said Emmerson.

“Eliminating the deficit before a May 2022 general election would be even harder: a combination of tax rises and spending cuts worth £15bn on top of current plans.”

 

Source: The Guardian


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