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IFS predicts more spending cuts and low growth

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The Institute for Fiscal Studies has announced its Green Budget, with predictions and analysis highly critical of the UK economy.

The London-based think tank predicts that sharp spending cuts are due to arrive before the next election, with tax rising to a greater proportion of national income than has been seen since the mid-1980s: the IFS says that spending cuts and tax rises will continue into the 2020s.

The report was compiled with analysis from Oxford Economics, which expects a “relatively disappointing” 1.6% GDP growth this year, and 1.3% growth in 2018, with wages almost static.

“For all the focus on Brexit the public finances in the next few years look set to be defined by the spending cuts announced by George Osborne,” explained IFS director Paul Johnson. “Cuts to day-to-day public service spending are due to accelerate while the tax burden continues to rise. Even so, the new chancellor may not find it all that easy to meet his target of eliminating the budget deficit in the next parliament. Even on central forecasts that is going to require extending austerity towards the mid-2020s. If the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”

Andrew Goodwin, Oxford Economics’ lead UK economist, said that the UK economy has thus-far achieved solid growth – but that it has been almost entirely reliant on the consumer. “With spending power set to come under significant pressure from higher inflation and the welfare squeeze, the consumer will not be able to keep contributing more than its fair share. Exports should be a bright spot, but overall a slowdown in GDP growth appears likely.”

“If the government is able to agree a transitional arrangement with the EU and make progress on a free-trade agreement then the impact of Brexit is likely to be fairly modest within our forecast horizon of 2021. However, the negative effects of leaving the single market and the customs union are likely to become clearer over time and we estimate that the new trading arrangements could reduce UK GDP by around 3% by 2030, compared with remaining in the EU. Should we fail to secure a free-trade agreement then the outcome is likely to be worse still.”

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