LONDON (Reuters) – Britain’s borrowing is set to fall faster than official forecasts as the economy recovers from the COVID-19 pandemic, but the scope for higher spending to meet Prime Minister Boris Johnson’s promises remains limited, a leading think tank said.
The Institute for Fiscal Studies (IFS) predicted public borrowing for the 2021-22 financial year would fall to 180 billion pounds ($245 billion), still one of the highest readings on record, but 54 billion pounds lower than the government’s Office for Budget Responsibility (OBR) forecast in March.
Britain borrowed a record 325 billion pounds last financial year – equivalent to 15% of gross domestic product – as the government spent heavily on healthcare as well as support for furloughed workers and businesses during the pandemic.
Finance minister Rishi Sunak will set out new budget forecasts from the OBR, as well as longer-term spending plans, on Oct. 27, when the government hopes to refocus on ‘levelling-up’ poorer parts of England where Brexit-backing voters swung in support of the Conservative Party in a December 2019 election.
However, the IFS said Sunak would have less cash to play with than the headline fall in borrowing might suggest.
“The combined effects of ever-growing spending on the National Health Service and an economy smaller than projected pre-pandemic mean that he is still likely to be short of money to spend on many other public services,” IFS director Paul Johnson said.
Rising debt interest payments – due in part to Britain’s large stock of inflation-linked bonds – and longer-term damage from COVID-19 and Brexit meant borrowing was likely to fall more slowly in future years.
Sunak has already announced higher payroll taxes for workers and employers from April and plans to sharply increase the tax rate on company profits a year later.
The IFS said the tax burden would rise to its highest sustained level since at least the mid-1950s.
Outline spending plans from Sunak point to day-to-day spending on public services rising by an average of 3.2% in real terms over the next three years – a contrast to the decade of austerity spending cuts after the 2008-09 financial crisis.
But most of that increase is earmarked for higher spending on healthcare, schools and defence, leaving areas such as further education, prisons and local services facing short-term cuts and a medium-term rise of less than 1% a year.
“This could be difficult to reconcile with the government’s promises on levelling-up and social care reform,” the IFS said.
($1 = 0.7332 pounds)
(Reporting by David Milliken; Editing by William Schomberg)