A report from the Institute of Fiscal Studies (IFS) suggests the UK deficit is now back to the level it was at prior to the financial crisis, helped by tax raising measures which have seen both tax revenues and spending rise to slightly above their pre-crisis levels, as the snap election called by Theresa May approaches
The think tank found seven years of austerity has seen significant spending cuts, particularly in areas such as working age benefits, but overall public spending remains slightly above its pre-crisis share of the economy. It says this is due to persistently poor economic growth, and an increase in the share of national income devoted to health, pensioner benefits and overseas aid.
The IFS says eliminating the deficit before a May 2022 general election would require a combination of further net tax rises and spending cuts worth £15bn on top of what is already planned.
The increase in revenues as a share of national income since 2009–10 has been driven by tax rises announced since May 2010. Fiscal events in the 2010 parliament contained measures that had the net effect of boosting revenues in 2017–18 by an estimated £10bn, which the IFS says is down to £60bn of tax rises being offset by £50bn of tax cuts.
The think tank calculates the net effect of measures announced since May 2015 has also been to increase tax. They are estimated to raise £15bn in 2021–22. This figure arises from tax raising measures worth £35bn being offset by tax cuts worth £20bn.
Carl Emmerson, deputy director of the IFS and author of the report, said: ‘The deficit is now roughly back to the level it was prior to the financial crisis, although is still above its long-run average.
‘On the tax side the impact on the public finances of substantial tax cuts has been more than outweighed by tax raising measures. The net tax rise in the current year from measures announced in the last parliament is an estimated £10bn, with an eventual £15bn a year from measures announced in the current parliament. These are helping push government revenues towards their largest share of the economy since 1986–87.’
The IFS maintains that the UK’s public finances compare unfavourably to other advanced economies, although it says this is true of other very large economies such as Japan, France and the US. In 2016 the UK had the fifth largest deficit out of 35 advanced economies and the sixth largest debt out of 26 advanced economies.
The IFS briefing note, Two parliaments of pain: the UK public finances 2010 to 2017, is here.
