Rishi Sunak will struggle to deliver the Conservative election manifesto promises without “borrowing a hell of a lot more or raising taxes”, according to the Institute for Fiscal Studies.
In an analysis of the choices facing the chancellor ahead of the spending review this autumn, the think-tank said on Tuesday that persistent pressures from coronavirus would weigh on the economy and reduce options available to ministers.
The IFS recommended that with uncertainty still very high, Mr Sunak should limit budgets for government departments and local authorities to just the 2021-22 financial year rather than opt for the usual multiyear settlement only to have to revisit it later. Mr Sunak will hold a spending review by the end of November, but has not decided what form it will take.
Ben Zaranko, an economist at the IFS and author of the paper, said it was “an extraordinarily difficult” time to be setting spending plans. He added that the government would struggle to fulfil its ambition to improve public services and level up underperforming parts of the UK as promised in the 2019 election.
“There is no way you could do all of that without borrowing a hell of a lot more or raising taxes,” Mr Zaranko said, adding that the greatest difficulties would come in delivering the promised improvements to public services.
The IFS report came as another think-tank, the Centre for Cities, said the government would face difficulties delivering on its “levelling up” agenda because it had not defined what it meant by the phrase and still thought it could direct the policy from Whitehall.
Andrew Carter, chief executive of the Centre for Cities, said that as well as defining its objectives, the government would need to spend more than £100bn on the project over 10 years if it wanted to achieve a narrowing of the economic gap between regions.
“There are deep economic divides between places in this country and it will take a very significant sum of money to close them,” Mr Carter said.
That sort of money, the IFS, said would be difficult to commit after the coronavirus pandemic because there was likely to be a need for continued spending on test and trace, protective equipment and resilience in the public sector for many years after the epidemic waned.
But the IFS estimated an extra £20bn was needed to ensure public services remained resilient in future years, which would reduce real annual growth in day-to-day departmental spending between 2020-21 and 2023-24 from the March Budget plans of 3.6 per cent to just 1.7 per cent.
Some of the difference could be made up by cuts to capital budgets, but the institute said that would further undermine the government’s adherence to its manifesto, which promised large increases in capital spending.
The pressures would become even greater if the pandemic or Brexit left long-term scars which reduced the size of the economy and tax revenues at the same time as raising the share of public spending, the IFS said.
The chancellor should avoid the temptation of raising taxes in these circumstances to help the economy recover.