A £30bn borrowing boost has given the Chancellor more than enough fiscal firepower to end austerity in his upcoming Spending Review, the Resolution Foundation said today (Wednesday) in response to the Spring Statement.
The OBR delivered a slighter weaker outlook for economic growth this year – down from 1.6 to 1.2 per cent – meaning the economy is now expected to be £54bn a year smaller in 2021 than forecast before the 2016 referendum.
But the economic downgrade was in contrast to an improvement in the public finances. This has been driven by assumptions that income tax receipts will remain stronger, and debt interest payments lower, than previously thought. Higher income tax receipts reflect higher employment and earnings, but also the fact that higher earners have done particularly well – with the top 0.1 per cent seeing pay growth of 5.9 per cent, compared to 3.7 per cent overall.
This borrowing boost has increased the Chancellor’s headroom against his main fiscal target to £26.6bn in 2020-21, rising to £34.9bn in 2022-23 at the end of the Spending Review period.
Though he held off doing so today, this headroom gives the Chancellor more than enough fiscal firepower to end austerity later this year, while still seeing debt falling and absorbing the £13bn deficit impact of student loans being more fully accounted for.
The Foundation notes that on current spending plans, the Chancellor would be delivering cuts of almost 2 per cent on a cumulative basis to unprotected government departments between 2019-20 and the end of the proposed Spending Review period. Increasing spending by £2.9bn would ensure unprotected departments did not see real terms per capita cuts, while a bigger increase of £7.9bn would ensure their day-to-day budgets kept pace with the size of the economy.
While the Chancellor held out the prospect of ending austerity for public services, he has allowed it to continue for low and middle income households.
The final year of the freeze on working age benefits, which takes effect next month, will leave a low-income couple with children £200 worse off next year, rising to £580 once the full effect of the freeze is included. Overall tax and benefit changes being introduced this April will take £100 from families in the bottom fifth of the income distribution and give £280 to those in the top 10 per cent.
Torsten Bell, Director of the Resolution Foundation, said:
“In a speech light on policy, the Chancellor used a £30bn windfall from the OBR to promise sunny uplands if Parliament delivers a smooth Brexit in the months ahead.
“The Chancellor’s £26bn of fiscal firepower is more than enough to bring austerity to an end in the Spending Review later this year. This marks a major shift as the debate in British politics moves to focusing on how much more we should spend, rather than how deeply to cut.
“But despite improvements to the public finances driven in part by particularly fast earnings growth for high earners, austerity will continue for just about managing families, who face a £1.8 billion hit from the benefit freeze in just three weeks’ time.”
The Foundation welcomes the announcement that leading economist Professor Arin Dube will lead a review of the international evidence on minimum wages, with a view to further increases in the wage floor helping to end low pay altogether.
Stephen Clarke, Senior Economic Analyst at the Resolution Foundation, said:
“Britain’s success in reducing low pay in recent years has been based on matching bold policy ambition with a strong evidence base.
“Appointing Professor Arin Dube to review the evidence on minimum wages around the world is therefore a welcome first step towards meeting the Chancellor’s ambition of ending low pay altogether.”
Notes to Editors
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