Britain’s public services other than health, defence and education face a £20 billion shortfall in Jeremy Hunt’s pre-election Budget, top economists said on Thursday.
Institute for Fiscal Studies director Paul Johnson challenged several assumptions on which the Chancellor based his tax-and-spend plans yesterday, including eye-wateringly tight projections for Government departments, and economic growth forecasts based on net migration rising, not falling.
“Making the numbers work in the overall Budget is predicated on very, very tight spending plans when he wants to protect health and education, and eventually raise defence spending to 2.5 per cent of national income,” Mr Johnson told the Standard.
“Against that backdrop, the idea of abolishing National Insurance is for the birds,” he said, after Mr Hunt lopped another 2p off National Insurance and said he wanted to scrap double taxation of workers on top of income tax.
Reducing National Insurance remained preferable to more expensive cuts to income tax, Mr Johnson said, after Tory Right-wingers had urged Mr Hunt to go further.
But with frozen tax thresholds dragging millions more into paying income tax, most pensioners will end up £650 a year worse off by 2027, and over £3,000 a year worse off if they are higher rate tax payers, Mr Johnson calculated.
He noted that even for the NHS, an extra £2.5 billion announced by Mr Hunt would merely stop a real-terms fall next year, while unprotected departments face the likelihood of cuts given rising inflation.
The Budget’s maths rest on fuel duty rising in a year, even though Mr Hunt froze the supposedly temporary 5p cut yesterday for the 15th year running, and on investment spending falling by £18 billion a year in real terms.
“Somewhere between the two lies the effective promise that day-to-day spending on a range of public services outside of health, defence and education will fall by something like £20 billion,” Mr Johnson said.
“Maybe that is possible, but keeping to these plans would require some staggeringly hard choices which the Government has not been willing to lay out. Indeed, we heard yesterday that the next spending review, in which these choices will have to be announced, will rather conveniently not happen until after the election.”
James Smith, research director at the Resolution Foundation, agreed that the Budget had set the stage for “big cuts to public spending” after the election.
“So this is something like three-
quarters of the intensity of the cuts that we got from 2010 and it’s getting on for £20 billion,” he said.
Despite the National Insurance cut, the overall tax burden continues to rise and is set to reach the highest level since 1948, according to the Office for Budget Responsibility. Mr Johnson said that the Budget’s revenue calculations also relied on net migration going up, even though Mr Hunt said it would fall.
“The OBR numbers say the opposite. Labour force participation is actually lower than we expected and is being made up for by more people coming into the country, not fewer. So the Chancellor is actually reliant on immigration to get the growth he’s talking about. And with more people, his spending plans look even tighter, with a larger population needing education, the NHS and so on,” he said.
The IFS chief stressed that for the Conservatives, it was a less than ideal background against which to hold an election this year.
“It looks like on average, people’s incomes at the end of this year will still be lower than at the 2019 election. An entire Parliament without an increase in household incomes, I think, is unique. People are not going to feel terribly happy about that.”
