Chancellor facing tough decisions over tax and austerity
Chancellor Philip Hammond will have to continue tax rises and spending cuts beyond 2021/22 if he is to meet his target of balancing the nation's books by the middle of the next decade, a report has warned.
But the report by the Institute for Fiscal Studies (IFS) said Mr Hammond could meet growing public demand for an end to austerity by ditching the target and leaving the deficit at its 2016/17 level of 2.4% of GDP.
This would allow a £17bn boost for public services, £5bn of tax cuts and an £11bn increase in planned benefit spending - a total giveaway of £33bn a year - while still seeing state debt fall as a share of national income, so long as the economy continues to grow as expected.
The analysis comes as speculation is mounting that Mr Hammond may be preparing to use his autumn Budget to ease the austerity policies in place since Conservatives took office in 2010.
While recognising that abandoning austerity would require "a very sharp change in direction", IFS deputy director Carl Emmerson said it was "an option in a way that it was not an option back in 2010".
However, Mr Emmerson warned that it would leave the Chancellor with "less room for manoeuvre" if growth stalls as a result of Brexit.
Having soared to 9.9% of national income in 2009/10 after the financial crisis, the deficit - the amount the Government spends more than it takes in taxes and other revenues each year - now stands below its pre-crisis level of 2.6% of GDP and is the lowest it has been since 2003/04.
"We could choose to continue to run deficits of around the current level over the longer term," said Mr Emmerson, who unveiled his analysis at the Institute for Government in London.
"If the economy were to grow as expected, this would be sufficient to see debt fall as a share of national income over the longer term.
"It would mean that over the next few years household incomes could be better supported and a greater quality and quantity of public services could be enjoyed. But it would also involve planning to live with elevated public sector debt for longer.
"It could give the Chancellor less room for manoeuvre if the economy were to suffer badly, for Brexit-related or other reasons, over the next few years.
"And it would almost certainly require the abandonment of the pledge to eliminate the deficit in the mid-2020s."
If Mr Hammond instead chose to increase taxes to shore up public service spending, he could raise £5bn a year without affecting the deficit by cancelling the planned cut in corporation tax from 19% to 17%.