Govt needs additional £5bn to fund spending promises, IFS says

Ahead of tomorrow’s Spending Review, the Institute for Fiscal Studies (IFS) has calculated that the Treasury will need to find an extra £5bn from next year to fund the government’s spending promises, adding that the increase could undermine the Treasury’s commitment to reduce borrowing.

Prime Minister Boris Johnson said on Monday that this Wednesday’s Whitehall Spending Review, which will set out department funding for 2020/21, would be the “most ambitious spending round for more than a decade”.

The IFS forecast that next year’s spending on public services is already set to be at least £9bn more than this year’s, with pledges on schools, further education, the NHS, defence and overseas aid.

“The Chancellor will need to find a way to fund an extra £5 billion of spending next year, relative to plans published at the Spring Statement, just to avoid cuts to other public services. Increasing spending on other priority areas would require even greater funding,” the institute added.

At the time of the Spring Statement, Office for Budget Responsibility (OBR) figures granted the government £15bn of headroom against its target to keep borrowing below 2 per cent of national income next year. However, the IFA noted that the Spending Review will not be accompanied by new OBR forecasts, so the Chancellor “is likely” to announce spending increases and claim he is meeting his fiscal targets.

IFS director Paul Johnson claimed the government was taking risks by pushing ahead with spending commitments without updated guidance from the OBR, stating: “Making big fiscal announcements in a period of great economic uncertainty means we will have little idea how sustainable or costly decisions made this week will be. The risks are exacerbated by not having up-to-date forecasts from the OBR.”

The institute warned that making “major fiscal announcements” without new OBR forecasts risk a return to the “bad old days” when Chancellors could make fiscal claims “not based on the best available independent forecasts”.

IFS associate director Rowena Crawford said: “Based on OBR forecasts from the spring it looks like the Chancellor has plenty of room to meet his spending pledges, increase spending in some other priority areas and avoid any further cuts, while keeping to his pledge to keep borrowing below 2% of national income. But growth has slowed since the spring and in reality he may have a lot less than the £15 billion of headroom he seemed to have back then”.

An author of the report, Ben Zaranko, added that the Spending Review will need to “consider very carefully the clear and growing need for funding in our justice system and in local government”, where cuts over the past decade have been “particularly severe”.

The report’s warning echoed criticism last week from the Resolution Foundation, which said Chancellor Sajid Javid was poised to break his first promise as Chancellor by increasing government borrowing above limits detailed in the Conservative manifesto.

The foundation noted that the UK’s international credibility would be tarnished if further spending commitments sent borrowing levels soaring beyond the limit set by the Treasury of 2 per cent GDP, especially when it was already likely that the UK would leave the bloc without a deal.

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