Philip Hammond has made it clear he would like next week’s Budget to be a low-key affair - an update on his first major statement of fiscal policy in the autumn. The UK chancellor may struggle to keep it that way. Britain’s public finances have held up better than was expected a few months ago but this happy situation may not last.
Despite a rising tax burden and accelerating cuts to spending on public services, Mr Hammond may need to find further savings totalling £40bn in the next parliament if he is to hit his target of eliminating the public deficit. Yet after six years of cuts, the strains on public services are increasingly apparent. Waiting times for cancer treatment are creeping up; the social care system is dangerously close to collapse; violence in prisons is on the rise and many schools, whose funding has been largely protected until now, will soon face real terms budget cuts. Voters will notice and mind about these pressures. Mr Hammond may be running up against the limits of austerity.
This does not mean the chancellor should cast prudence aside. He should continue to resist pressure from other ministers to use up the £27bn leeway he has left himself to ensure he can meet his target of bringing net borrowing below 2 per cent of gross domestic product by 2020. He may need this buffer because much of this year’s undershoot in public borrowing is likely to be temporary. There are technical reasons why the recent strength of income and corporation tax receipts may not last. The Office for Budget Responsibility will need to take account of forecasts for higher interest rates, which will raise the cost of servicing gilts. There is the possibility the UK will suffer a Brexit-induced downturn, even if it has escaped one so far.
However, if there is any structural improvement in the public finances, it would be perverse for Mr Hammond to insist on saving all the windfall. In any case, rather than pressing ahead with the spending cuts initiated by his predecessor George Osborne, there is a strong case for him to raise taxes in order to alleviate the squeeze on living standards and core public services. Otherwise, as the Institute for Government warned this week, the result could be a “disastrous combination” of failing services and breached spending controls in a couple of years’ time.
Treasury officials are no doubt deploying all their ingenuity to find new sources of revenue. Higher inflation as a result of sterling’s depreciation could help, if it is accompanied by rising incomes that push people into higher tax brackets. There could also be tougher treatment of the self-employed and of sole traders setting themselves up as a company, who enjoy tax breaks at present.
But there are signs that the government is struggling to make the sums add up. For example, the move to strip benefit entitlements from people with disabilities, a politically costly battle that ministers would not fight when finances were less tight.
The problem is that manifesto pledges prevent Mr Hammond from raising revenues by any of the most obvious routes - income tax, national insurance contributions or value added tax. They also commit him to tax cuts that will largely benefit those on middle and higher incomes and to the “triple lock” on pensions, which a parliamentary committee deems to be sustainable in the long term only if the state pension age rises to 70.
Perhaps it is time to recognise that these promises no longer make sense. There would be political repercussions. But the consequences of ignoring the growing pressures on public services could be more serious.
