The Treasury will need to find an extra £5bn from next year to fund the government’s spending promises, according to the Institute for Fiscal Studies (IFS), which said the increase could undermine the Treasury’s commitment to reduce borrowing.
Boris Johnson said on Monday that Wednesday’s Whitehall spending review, which will set out department funding for 2020/21, would be the “most ambitious spending round for more than a decade”.
The IFS said it was likely that pledges made in recent weeks to recruit 20,000 police officers and add £2.6bn to the annual schools budget would need to be funded by large increases in borrowing if official forecasts were brought up to date and incorporated the recent slump in economic activity.
Paul Johnson, the IFS director, said the government was taking risks by pushing ahead with spending commitments without updated guidance from its independent forecaster, the Office for Budget Responsibility (OBR).
“Making big fiscal announcements in a period of great economic uncertainty means we will have little idea how sustainable or costly decisions made this week will be. The risks are exacerbated by not having up-to-date forecasts from the OBR,” he said.
The warning echoes criticism last week from the Resolution Foundation, which said Sajid Javid was poised to break his first promise as chancellor by raising government borrowing above limits set in the Conservative manifesto.
The foundation said the UK’s international credibility would be tarnished if further spending commitments sent borrowing levels rocketing beyond the limit set by the Treasury of 2% of GDP, especially when it was already looking likely that the UK would leave the EU without a deal.
Johnson said the government’s pre-announced pledges amounted to a £9bn boost for the government departments targeted for extra spending. However, up to £4.5bn was already pencilled into the budgets affected, leaving the government to find £5bn to meet its promises.
In March the OBR estimated that public borrowing would be £29bn this year before falling to £19bn next year.
“Borrowing of £19bn in 2020/21 would be £27bn below the maximum £46bn consistent with the government’s fiscal rule which says borrowing should be below 2% of national income,” said the IFS report.
Around £12bn of student loans will be added to the government’s borrowing target, leaving just £15bn of headroom for extra borrowing.
Johnson said the next set of forecasts from the OBR, due later this year, were likely to reflect a deterioration in the outlook for the economy and public finances.
“This could mean the chancellor’s £15bn of apparent headroom shrinks. He may claim that he is keeping planned borrowing next year within 2% of national income but new OBR figures due later this autumn could suggest otherwise.”
