Rishi Sunak is poised to usher in cuts worth £2bn for government departments tasked with meeting the Tories’ flagship “levelling up” agenda, despite planning for the biggest tax raid in a generation.
The Institute for Fiscal Studies (IFS) said the chancellor was on track to lift the UK’s tax burden to the highest sustained level in peacetime with a package of manifesto-busting tax increases at this month’s budget and spending review.
While the tax raid would help fund an expansion in the state to the highest level of government spending since 1985, the leading independent thinktank for the public finances said several Whitehall departments would still face budget cuts.
In an intervention ahead of Sunak’s landmark post-lockdown budget due later this month, the IFS said perennially squeezed areas such as local government, further education, prisons and courts could have their budgets cut by more than £2bn next year.
“These budgets were cut substantially in the 2010s, and a further round of cuts would be difficult to reconcile with the government’s stated objectives – particularly around ‘levelling up’,” it said.
In its “green budget” assessment of the public finances, issued with economic forecasts from the investment bank Citi, the thinktank said overall government spending was on track to settle at 42% of national income, about 2% higher than before the pandemic.
However, it warned the pressures from an ageing population meant a growing share was going towards health, while less was being left over for other areas of Whitehall spending despite voluble Tory promises about levelling up and ending austerity.
Without a substantial shift in direction, it said Sunak was on track to raise spending on public services other than health, defence, schools and overseas aid by less than was planned before the spread of the coronavirus last year.
Against a backdrop of rising living costs amid an unfolding autumn energy crisis, the IFS said tax rises announced by the government were effectively being “smuggled in” under the cover of the pandemic.
Last month Boris Johnson gave the green light to a manifesto-busting national insurance hike to fund health and social care, while Sunak announced plans earlier this year to raise corporation tax by 2023, reversing decades of Tory orthodoxy for lower taxes and state intervention.
The chancellor last week painted himself as a low-tax Thatcherite in a centrepiece speech to party members at the Conservative conference in Manchester, saying he would prioritise balancing the books.
Offering the chancellor wiggle room before the budget, the IFS said he was likely to benefit from a £50bn boost for the public finances this year compared with official forecasts made in March.
It said it expected the deficit – the shortfall between state spending and income – would come in at about £180bn for the current financial year, significantly below the Office for Budget Responsibility’s spring forecast for borrowing of almost £240bn.
Speculation has been mounting among senior Tories that Sunak could build up the headroom for a package of tax cuts before the next general election, pencilled in for 2024, should the British economy continue on its stronger than expected recovery from Covid.
The IFS said the chancellor could benefit from public borrowing coming in at about £20bn lower than forecast by the OBR in March by the end of the parliament, with the government finances set to return to a surplus for day-to-day spending by 2023-24.
However, it warned there was still heightened uncertainty over the lasting impact Covid-19 would have on the economy and public finances, while pressures on health and social care spending were only increasing.
Analysis from Citi estimated the UK economy would be between 2% and 3% smaller in 2024-25 than before the pandemic, with Brexit causing a deeper scarring effect than Covid.
“The scarring just because of the pandemic may not be as large as we thought last year. The scarring due to Brexit may actually be larger,” said Christian Schulz, the bank’s director of European economics. “Brexit is casting a long shadow over the economy.”
Under the most optimistic scenario, the IFS said the government could reap the biggest current budget surplus since 1972; while under the most pessimistic, planned tax increases would need to be tripled to reach the same outcome.
Paul Johnson, director of the IFS, said: “[Sunak] still faces huge uncertainty over the direction of the economy and hence over the state of the public finances. He will be hoping against hope that stronger-than-expected growth in revenues over the next few years will help to dig him out of what still looks like a fair-sized hole.”
A spokesman for the Treasury said the government would continue to invest in the public’s key priorities.
“Core departmental spending will grow in real terms over this parliament at nearly 4% per year on average – a £140bn cash increase and the largest real-terms increase in overall departmental spending for any parliament this century.”
