IFS forecasts British gov't spending cuts to continue into next decade

The current spending plans of the British government will mean that cuts to its services will continue well into the 2020s, according to a report issued on Tuesday by the Institute for Fiscal Studies (IFS).

British Chancellor of the Exchequer Philip Hammond, said in his first budget statement late last year that he would stick to the plans of his predecessor George Osborne to cut public service spending, which is due to fall by 4 percent in real terms over the next three years.

Hammond's decision to continue cutting services and to eliminate the deficit sometime in the next parliament followed nearly seven years of tax rises and spending cuts since 2010 under David Cameron's premiership, as his two governments sought to tackle the post-financial crisis situation.

A sharp cut in spending is planned by Hammond for 2019-20, immediately prior to the next general election. While spending cuts are playing a greater role than tax rises in reducing the deficit, tax is set to rise as a share of national income to its highest level since 1986-87.

Hammond has not set himself any fiscal targets that can be missed during the current parliament. But meeting his target of eliminating the deficit during the next parliament (2020-25) will probably mean an additional consolidation of up to 34 billion pounds (42.5 billion U.S. dollars), extending the period of spending cuts and tax rises well into the 2020s.

In its Green Budget report, the IFS said that real spending on public services has fallen by 10 percent since 2009-10 -- which it described as "by far the longest and biggest fall in public service spending on record."

Despite the seven years of cuts to government spending under Cameron's coalition government and then his Conservative government, the deficit this year in government spending will be higher than in all but 13 of the 60 years before 2008, and remains the fourth highest of 28 advanced economies.

In addition, said the IFS report, British national debt is at its highest level as a fraction of national income since 1965-66, and is higher than that faced by all but five other advanced economies.

Paul Johnson, IFS director 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 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."

The Green Budget also forecast lower growth in the British economy as a result of the expected effects of the coming Brexit negotiations on business sentiment and of inflation driven by a sharp fall in sterling after the Brexit referendum result.

Britain's GDP growth will be 1.6 percent in 2017 and 1.3 percent in 2018, it was forecast in the Green Budget, with the weaker outlook largely driven by higher inflation, the bulk of which results from the recent sterling depreciation.

Real earnings could rise by 0.2 percent in 2017 compared with 1.7 percent in 2016, as inflation rises.

Exports are forecast to do better as a result of the weaker pound, but overall the negative effects from higher inflation on consumer spending are likely to outweigh these positive effects, the Green Budget said.

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... 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, added Goodwin.

However, the negative effects of leaving the single market and the customs union are likely to become clearer over time and the Green Budget estimated that the new trading arrangements could reduce British GDP by around 3 percent by 2030, compared with remaining in the EU, Goodwin said.

"Should we fail to secure a free-trade agreement then the outcome is likely to be worse still," he said. (One pound= 1.25 U.S. dollars) Endit