Budget: Hammond faces spending dilemma, says IFS

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Philip Hammond says driving down the deficit remains ‘the right way to go’

The Chancellor is facing the conflicting pressures of a push to spend more while also trying to cut the deficit, a leading think tank has said.

The Institute for Fiscal Studies said Philip Hammond was under pressure to fund public sector pay rises and spend more on the NHS, schools and benefits.

Yet spending more in November’s Budget would make it harder for him to cut the deficit, said the IFS’s Carl Emmerson.

Mr Hammond was in a “very difficult position”, the deputy director said.

“Does he allow higher borrowing to persist, does he add to that with more spending, or does he try to offset that with higher taxes?”

Even if the Budget, on 22 November, includes some “giveaways”, it would not mean an end to austerity, he added.

“That’s likely to continue, whatever he announces.”

The IFS said Mr Hammond may have to abandon the government’s aim of balancing the public finances by 2025.

“Given all the current pressures and uncertainties, and the policy action that these might require, it is perhaps time to admit that a firm commitment to running a budget surplus from the mid-2020s onwards is no longer sensible,” Mr Emmerson said.

However, that could be politically unpalatable for the Conservatives.

Mr Hammond told the BBC last week: “We’ve already moved the target for balancing the books out from 2020 to 2025, but continuing to drive down the deficit in a measured and sensible way over a period of years … has to be the right way to go.”

The forecast for the deficit – the difference between the government’s everyday spending and its revenues – is likely to increase significantly if the Office for Budget Responsibility cuts its prediction for productivity growth of 1.6% a year given the sluggish performance of the UK economy.

If the OBR reduces its forecast to 1%, the IFS said, the deficit would more than double to almost £36bn by 2021-22.

The projected deficit could be as much as £70bn if the Budget watchdog decides that productivity growth is closer to the 0.4% recorded over the past seven years.

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Carl Emmerson of the IFS says the Chancellor is in a ‘very difficult position’

Mr Emmerson said another complicating factor was Brexit, given the uncertainty around its impact on economic growth, tax revenues and the public finances.

He and IFS research economist Thomas Pope wrote the report, Autumn 2017 Budget: options for easing the squeeze, which was funded by the Institute of Chartered Accountants in England and Wales and the Economic and Social Research Council.

The IFS is an independent research institute founded in 1969 that aims to better inform public debate on economics.

It releases a closely watched analysis of each Budget the following day.

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