Philip Hammond MP. Photo credit: NATO Summit Wales 2014 via photopin (license)

Anyone thinking the worst of austerity is over may need to start planning a long-term getaway, as a new report from the Institute for Fiscal Studies (IFS) predicts public service cuts and tax rises could continue “well into the 2020s”.

Chancellor Philip Hammond has committed to reducing the structural deficit to no more than 2% of national income by 2020–21, compared to his predecessor George Osborne’s plan to entirely eliminate the deficit by 2019–20, but analysis suggests “there is a more than one-in-three chance that he will miss even this looser target”.

Public spending is due to fall by 4% in real-terms over the next three years, but the IFS warns this alone won’t be enough to eliminate the deficit and warns an additional £34 billion in spending cuts and tax rises will be needed in the next parliament.

The majority of these savings are forecast to come from cuts to public services, rather than tax rises. Uncertainty over the impact of Brexit, the falling value of sterling, and potential inflation rises could make the outlook even worse.

The national debt is at its highest level as a fraction of national income since 1965–66, and the UK’s deficit remains the fourth highest of 28 advanced economies – so much for the Tories being the party of economic competence? This is despite spending on public services falling by 10% since 2010-11, including vicious cuts to welfare benefits.

The IFS also says “efforts to reduce spending on disability and incapacity benefits have delivered much lower savings than hoped”, and questions the Government’s “ambitious target to halve the gap in employment rates between the disabled and non-disabled populations”.

Government spending on incapacity benefits rose to £15bn in 2015–16, 45% higher than was forecast just three years earlier. However, spending on incapacity benefits is lower as a share of national income than in any year since 1989–90. This is mainly due to awards falling from a quarter to a just a fifth of average male full-time earnings.

Spending on disability and incapacity benefits for working-age people (£24 billion) is equivalent to only a quarter of that spent on pensioner benefits. This does, however, include state pension, which many people reading this will not regard as a ‘state benefit’.

The four-year benefit squeeze is also predicted to become more painful, if projected inflation rises become a reality. The SNP and others recently called on the UK Government to scrap the freeze to reduce child poverty.

The ‘Green Budget 2017’ report says that whilst halving the disability employment gap – the difference between the number of disabled and non-disabled people in work – “would be a truly remarkable achievement”, it would require unemployment among working-age disabled people to fall by a third – a target many charities and political commentators claim is unrealistic.

According the report, the biggest threat to public finances may arise from pressure on health and social care spending. Spending on health has seen the slowest growth rate since the mid-1950s, contrary to claims by ministers that the Government is investing heavily in the NHS.

“Department of Health spending in the decade between 2009–10 and 2019–20 will be slightly less than required just to keep pace with population growth and ageing”, the report says.

Meanwhile, adult social care spending has fallen by more than 6% since 2009–10, while the number of people aged 65 and over has risen by almost 16%. Spending per person is expected to continue falling in the coming years, despite fears the system is close to collapse.

Oxford Economics, who provided analysis for the report, forecast that UK GDP growth will be a relatively disappointing 1.6% in 2017 and just 1.3% in 2018. And anyone hoping for a boost in earnings will be left disappointed. Real earnings are predicted to rise by just 0.2% in 2017 compared with 1.7% in 2016.

Paul Johnson, Director of the Institute for Fiscal Studies and an editor of the Green Budget, said: “For all the focus on Brexit the public finances in the next few years look set to be defined by the spending cuts announced by George Osborne.

“Cuts to day-to-day public service spending are due to accelerate while the tax burden continues to rise. Even so the new chancellor may not find it all that easy to meet his target of eliminating the budget deficit in the next parliament. Even on central forecasts that is going to require extending austerity towards the mid-2020s.

“If the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”

Andrew Goodwin, Lead UK Economist at Oxford Economics and co-author of a chapter in the Green Budget, said: “Though the UK economy has continued to achieve solid growth, it has been almost entirely reliant on the consumer. 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.

“Exports should be a bright spot, but overall a slowdown in GDP growth appears likely.”

“If the Government is able to agree a transitional arrangement with the EU and make progress on a free-trade agreement then the impact of Brexit is likely to be fairly modest within our forecast horizon of 2021.

“However, the negative effects of leaving the single market and the customs union are likely to become clearer over time and we estimate that the new trading arrangements could reduce UK GDP by around 3% by 2030, compared with remaining in the EU.

“Should we fail to secure a free-trade agreement then the outcome is likely to be worse still.”

Ross Campbell, ICAEW Director of Public Sector and co-author of two chapters in the Green Budget, said:  “The total liabilities of £3.6 trillion reported at 31 March 2015 have now reached 191% of GDP and are almost two and half times the narrower measure of public sector net debt reported in the National Accounts of £1.5 trillion.

“Put into perspective, WGA debt [The Whole of Government Accounts] is now equivalent to £130,000 per household – as opposed to £70,000 using statistical accounting.

“In order to restore trust in Government, and to give taxpayers a clear picture of how much liability the Government has assumed on their behalf, it’s important that more emphasis be placed on the WGA.”

Photo credit: NATO Summit Wales 2014 via photopin (license).