Chancellor Philip Hammond can hike NHS spending without raising taxes significantly in next week’s Budget, a leading economic thinktank is arguing.
The Centre for Economics and Business Research (Cebr) said this would come at the price of delaying some of the progress on balancing the books, but that ending departmental cuts would also give the economy a much-needed fiscal boost.
Cebr calculations suggest that this would include a continued freeze on fuel duties; an increase to NHS spending, including an additional £20bn by 2023; a digital services tax; scrapping the borrowing cap for new housing; and “ending austerity”, a somewhat elusive commitment but which it suggested is boosting or at least not cutting department spending limits.
Ending austerity
The report said: “The latest Office for Budget Responsibility forecasts project that the UK’s deficit will continue to fall gradually from 2.2% of GDP in financial year 2017-18 to 0.9% of GDP in financial year 2022-23.
“When factoring in the proposed increase in NHS spending, our analysis finds that the deficit would still continue to decline, falling to 1.3% of GDP by 2022-23.”
It said adding an “end of austerity” to the mix meant the deficit would fall to 1.5% of GDP by financial year 2022-23.
The report continued: “Our analysis shows that, while bold, many of the proposed boosts to fiscal spending can be achieved while maintaining the deficit’s downward trajectory – even without increasing taxes.”
It said this would set the government two to three years back on its target of achieving a balanced budget by the mid-2020s.
It added: “After eight years of austerity, many would forgive the government for applying a dose of fiscal stimulus, given the tempestuous times ahead for the UK economy.”
Recession fears
Cebr said the projections were based on central forecasts for the UK economy, assuming very weak but positive growth in the medium term.
However, it noted that “storm clouds are brewing for the global economy” and it had recently raised the risk of a global recession to one in three.
It added: “The UK economy faces particularly acute risks related to Brexit, such as the pre-Brexit stockpiling that is beginning to show in official data, which will likely be followed by a drawing down of stocks in 2019.
“Were the UK to enter a recession in the coming years, this would exert significant pressures on the public finances. However, there would arguably be a stronger case for counter-cyclical borrowing in this scenario, provided that this is temporary and not excessive.
Fiscal stimulus
“Regardless of whether the UK experiences a recession in the coming years, the economic picture looks likely to remain bleak. It is therefore our view that the government can and should delay its target of balancing the books by the mid-2020s.
“The boost to the NHS and cancellation of real terms cuts to day-to-day departmental spending can be achieved while continuing to bring down the deficit, and these policies would also deliver a fiscal stimulus at a time when the economy is in dire need of a boost.
“However, we stress that some government departments are in greater need of spending than others, and it is not our recommendation that expenditures in all departmental budgets are treated equally.”
Cebr also expected liberalised rules for accessing R&D tax reliefs and a more generous annual investment allowance.
