With next year expected to mark the point at which both the current deficit is finally eliminated and the debt-to-GDP ratio starts to fall, the Chancellor’s ‘tiggerish’ stance yesterday is understandable. But the light at the end of the austerity tunnel remains all too faint for the moment.
For households, the next few years are set to continue the post-crisis trend of disappointing living standards improvement. Ten years on from the start of the pay squeeze, recovery remains seven years away. And the vast majority of the large working-age welfare cuts announced back in July 2015 are still to bite, with low and middle income households likely to fare especially badly over the next two years. Despite some near-term improvement in yesterday’s forecasts, the UK remains in the midst of a squeeze on incomes that is set to last longer than the one experienced immediately after the financial crisis.
For the Chancellor too there are tough choices ahead. Philip Hammond has said that, come the next Autumn Budget, he wants to share the gains of lower borrowing forecasts between paying down the deficit, boosting public services and lowering taxes. Yet even with yesterday’s modest improvement in place, he isn’t expected to balance the overall budget – in keeping with his overall fiscal ‘objective’ – until the end of the next parliament. The implication is that something has to give. Either the UK economy will have to ‘beat the forecasts’, or he will need to introduce tax rises rather than tax cuts. Given longer-term fiscal challenges ahead, this latter course of action appears almost inevitable.