A prolonged battle against Covid-19 would swallow up a large chunk of the government’s planned increase in public spending and force the chancellor into an unenviable choice between fresh austerity, higher taxes or more borrowing, a leading thinktank has warned.
The Institute for Fiscal Studies said that even if only a quarter of the extra £70bn allocated by Rishi Sunak to fight the pandemic had to be repeated in future years, the Treasury would either have to find more money than set aside in this year’s budget or announce cuts.
The thinktank said tackling the virus, the lack of public appetite for another period of austerity and longer-term demographic pressures pointed to government spending as a share of overall economic output rising from its current level of 40% of GDP to possibly 45% by the middle of the 2020s.
Sunak has scrapped plans for an autumn budget due to the short-term problems facing the economy but has said he plans to go ahead with a multi-year spending review before the end of the year. The chancellor may well eventually decide to announce plans solely for 2021-22 given the uncertainty, a course of action recommended by the IFS.
The Treasury said: “The spending review will proceed this autumn, as planned. The chancellor has already confirmed that departmental spending will increase above inflation – both for day-to-day spending and longer-term investment.”
Ben Zaranko, an IFS research economist said: “The immense economic uncertainty associated with the Covid-19 pandemic, and the looming end of the Brexit transition period, make this an extraordinarily difficult time for the chancellor to be formulating public spending plans.
“Covid-19 has blown previous spending plans out of the water, with more than £70bn allocated to departments this year for day-to-day spending as part of the response to the virus. If some of these spending programmes – such as the running costs of NHS test and trace – are to be unfortunate facts of life for years to come, they could swallow up huge amounts of money, and leave some public services facing another round of budget cuts for their core services.
“Avoiding that scenario would require the chancellor to find billions of extra funding, paid for at some point through higher taxes.”
The IFS said the 2019 spending review and the 2020 budget had announced increases that would have reversed two-thirds of the deep cuts in per-person spending by 2023-24.
But it added the Covid-19 crisis had rendered these plans obsolete, with the health budget alone topped up by £35bn – a 25% increase.
The thinktank said if 25% of the spending triggered by Covid-19 needed to be permanent, the result would be to eat up almost half the planned £40bn increase in departments’ non-Covid budgets between 2020−21 and 2023−24.
Given the government’s commitments on the NHS, schools, the police and its “levelling up” agenda, that would almost certainly require another bout of austerity for some public services. “To meet those costs while keeping non-Covid spending growing at the rate planned in March would require the chancellor to find an additional £20bn by 2023−24, relative to his pre-pandemic plans,” Zaranko said.
Sunak has insisted that there will be no return to austerity but said last week that it was not sustainable to carry on spending at the current rate. The Treasury is not anticipating the Covid-19 crisis continuing until 2023-4 and the chancellor believes he can combine increases in spending with efforts to reduce the budget deficit.
The IFS predicted Sunak’s spending decisions were likely to result in public spending settling at a higher share of national income than after 10 years of Labour government in 2007–08.