IFS says UK economy left vulnerable by Budget

IFS says UK economy left vulnerable by Budget

The increase in borrowing undertaken by chancellor Rishi Sunak leaves the economy vulnerable to shocks, according to analysis from the Institute for Fiscal Studies (IFS) think tank. 

In its response to the Budget the organisation said that spending will increase by £76bn over the next four years, with just £7bn a year of extra tax revenue, meaning borrowing during that time will peak at £67bn a year, £30bn more than in the 2018/19 year.

The think tank said this level of borrowing, coupled with an economic growth forecast of 1.5 per cent, meant if a shock happened, which the think tank said could come from the Coronavirus having a more prolonged impact than it expects, or if the UK’s exit from the transition period agreement with the EU proves disruptive, then the chancellor would likely need to increase taxes to raise money, or cut spending. 

Paul Johnson, director of the IFS, said: “All the economic forecasts on which the core Budget was based were put together before any significant effect of the coronavirus was accounted for, and were therefore out of date at the moment of publication.

"If it turns out that the short term disruption caused by coronavirus is just that – short term – then all is well.

"Any significant longer term effect, though, and a smaller economy will mean the tax and spending plans set out [in the Budget] will lead to an even bigger deficit than currently planned in the first few years of this decade.”

He noted that many of the spending pledges in the budget related to the first two years of this parliament, and at the end of that time, if growth has not picked up by then, either spending would have to be cut, borrowing increased further or taxes raised.

The idea that increasing spending now as a way to increase economic growth in future is based on an economic theory known as the multiplier effect, where cash spent now percolates through the economy to generate further growth in future.

Mr Johnson said: “There is a risk that spending will be misallocated because there is so much more new capital to go around while current spending remains tight. These sorts of largely arbitrary distinctions can be costly.”

The 1.5 per cent growth figure can be seen in the context of Bank of England chief economist Andy Haldane stating in 2018 that the normal, long-term growth rate, what economists call the trend rate of growth, will be 1.5 per cent once the UK is outside of the EU.

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