Article:
Philip Hammond will admit to the largest deterioration in British public finances since 2011 in next week’s Autumn Statement when the official forecast will show the UK faces a £100bn bill for Brexit within five years.
Slower growth and lower-than-expected investment will hit tax revenues hard, the official forecasts will show, supporting the Treasury’s pre-referendum warnings that the long-term economic costs of Brexit are high.
Instead of a surplus in 2019-20, as his predecessor George Osborne had promised, Mr Hammond will show a sizeable deficit in that year with the gap between the borrowing forecast for each year in the Budget last March and the Autumn Statement getting bigger every year.
The deterioration in the outlook — which is still a forecast and highly uncertain — will not prevent Mr Hammond from finding room for some tax cuts to help what officials in Whitehall call “Jams”, meaning families who are “just about managing”. But these giveaways will be small compared with the additional borrowing the government will plan. There will not be much room in the public finances to reset fiscal policy with a big stimulus package.
The Office for Budget Responsibility has drawn up the forecasts the government will present and officials acknowledge they have been grappling for weeks with weak tax revenues and an outlook for lower growth.
The consensus of independent economic forecasts, which are generally close to the OBR’s, show mediocre economic growth until 2020 with higher inflation and weaker business investment combining to slow revenues to the exchequer. Once converted by the OBR into likely tax revenues, the deterioration in the public finances will cumulate to around £100bn.
The Institute for Fiscal Studies has estimated that a weaker economic outlook would lead to roughly £30bn in additional borrowing by 2019-20 before any gains from lower contributions to the EU budget are taken into account.
An official forecast along these lines would vindicate the Treasury’s pre-referendum central estimate of a £36bn annual cost of Brexit to the public purse but it would come only five years after the vote, indicating the cost might rise further in future.
By far the largest reason for the Brexit hole in the public finances will be lower growth. With bad income tax revenues so far this financial year, the OBR has already said it was “very unlikely” to hit the 2016-17 Budget forecast. With delays to the sales of Lloyds and RBS shares, Mr Hammond is likely to have to finance upwards of £15bn additional borrowing this year.
The red ink in the forecasts gets worse over time, mostly as a result of slower growth, but government decisions and some classification changes have also conspired to make Mr Hammond’s life difficult.
Since the Budget, the government has announced less stringent work capability tests for the disabled and a slower introduction of universal credit, which jointly add almost £5bn to borrowing over five years.
The Office for National Statistics has changed the way it measures corporation tax receipts, leaving a hole of almost £5bn in borrowing in 2019-20 and the fiscal watchdog is set to assume Britain does not save any money in net EU contributions by the end of the decade because government policy on this aspect of Brexit is not yet finalised.
Public sector debt will jump, Mr Hammond will be forced to admit, by £100bn this year, raising it from 83 per cent of national income to almost 90 per cent from higher borrowing and because the ONS has announced it will treat the Bank of England’s new term-funding scheme as additional debt.
The burden of debt is set to decline more slowly than thought in March, leaving the UK economy more vulnerable to risks of another downturn.