The chancellor, Rishi Sunak, is stuck with a pandemic-stricken economy and his promise to balance the budget by the middle of the decade, according to a leading economic think tank.
The economy has recovered more than expected in recent months, according to a new paper by the Institute for Fiscal Studies and Citibank. This prepares Mr Sunak for one-time spending aimed at combating the pandemic in this autumn’s planned spending review, the report said.
Still, while the UK economy has approached its pre-pandemic size, it is not expected to grow at a strong rate going forward. This is because “the pandemic is still expected to cause permanent damage to the economy”, the IFS said.
Unless Mr. Sunak increases borrowing, weak growth limits long-term spending commitments. Such a move would fly against his March commitment to have a balanced budget by 2025-2026.
Isabelle Stockton, an economist at IFS, said: “Strong economic growth and with it, strong realizations will be welcome news for the chancellor.”
However, “the chancellor has almost no extra space to provide sustainable spending if he is to stay on course to deliver the current budget balance”, he said.
Citibank, which prepared the economic forecast for the IFS paper, expects the economy to be 3 per cent smaller in terms of cash by the middle of the decade, compared to official pre-Covid forecasts.
The IFS said the prospect of a deteriorating economy, in addition to the impact of the chancellor’s promise of a balanced budget, forces options for cuts, tax increases or more borrowing this autumn.
This is likely to be a “very difficult spending review”, Ms Stockton said. “Of course, the chancellor could have decided he was comfortable with borrowing more. If so, he should have stated that explicitly.”
It comes amid reports that a long-needed solution to a shortfall in social care funding has been Delay in isolation of key ministers for Covid-19 risk. This was followed by speculation that the government’s solution was to increase the national insurance contribution, a The move was widely criticized As an unfair and inefficient solution by economists as it is a tax on the working age population.
Treasury plans drawn up in March already suggest some departments will face cuts. This is before any allowance for additional costs as a result of the pandemic.
The IFS calculated that it would spend £17 billion less on public services per year than was expected before the pandemic. The IFS said this has arisen from the impact of COVID-19 “despite rising costs and increasing demands”.
While the budget sets out the total amount that can be spent on services, known as the spending envelope, a spending review this autumn is meant to make longer-term allocations to departments in more detail. An expense review traditionally involves multiple departments lobbying the Treasury for funding behind the scenes.
In March, the chancellor committed to significant tax increases, including raising the corporation tax from 19 percent to 25 percent. A four-year moratorium on personal allowance for income tax was also announced.