UK public spending to top £1tn a year, thinktank forecasts

Boris Johnson is planning to ramp up government borrowing to spend more than £1tn a year, increasing the size of the British state to make it bigger than at any point under the 10-year premiership of Labour’s Tony Blair.

Analysis from The Resolution Foundation predicts government spending will rise above the £1tn mark for the first time in history by 2023-24. The report, published on Monday, comes as the chancellor, Rishi Sunak, prepares to deliver what is widely expected to be one of the most expansionary Conservative budgets in a generation.

Government spending ‘set to return to levels last seen in the 1970s’

The analysis compiled ahead of the Commons set piece on 11 March forecasts that the government would raise spending to about 40% of gross domestic product (GDP) by the end of the current parliament, eclipsing Tony Blair’s Labour government to take Britain back to 1970s levels of spending.

Jack Leslie, economist at the Resolution Foundation, said the plans marked a major shift for the traditionally small-state Tory party. “The chancellor’s big-spending plans to ‘level up’ the country through infrastructure projects will lead to a bigger state than at any point under Tony Blair,” he added.

However, the thinktank warned that the money for extra spending would probably require tax increases unless Sunak broke budget rules drawn up by his predecessor, Sajid Javid, before the former chancellor’s dramatic resignation earlier this month.

The drive by Johnson’s government to increase spending to close gaps between the richest and poorest regions of the country with greater investment in transport and major public works follows promises made at the election. Johnson’s party attacked Labour’s spending plans as reckless during the campaign, warning that the “cost” of a Jeremy Corbyn government would have been £1.2tn.

Any extra spending would still not undo a decade of cuts under the Conservatives, according to the foundation. Setting aside the department for health and social care, reversing even half the cuts to other departments would cost around £24bn. Extra spending on welfare to prevent further increases in child poverty would cost around £5bn more.

What is gross domestic product (GDP)?

Gross domestic product (GDP) measures the total value of activity in the economy over a given period of time. 

Put simply, if GDP is up on the previous three months, the economy is growing; if it is down, it is contracting. Two or more consecutive quarters of contraction are considered to be a recession. 

GDP is the sum of all goods and services produced in the economy, including the service sector, manufacturing, construction, energy, agriculture and government. Several key activities are not counted, such as unpaid work in the home. 

The ONS uses three measures that should, in theory, add up to the same number.

• The value of all goods and services produced – known as the output or production measure.
• The value of the income generated from company profits and wages – known as the income measure.
• The value of goods and services purchased by households, government, business (in terms of investment in machinery and buildings) and from overseas – known as the expenditure measure.

Economists are concerned with the real rate of change of GDP, which accounts for how the economy is performing after inflation.

Britain’s government statistics body, the Office for National Statistics, produces GDP figures on a monthly basis about six weeks after the end of the month. It compares the change in GDP month on month, as well as over a three-month period. 

The ONS warns that changes on the month can prove volatile, preferring to assess economic performance over a three-month period as the wider period can smooth over irregularities. 

The most closely watched GDP figures are for the four quarters of the year; for the three months to March, June, September and December.

The figures are usually revised in subsequent months as more data from businesses and the government becomes available.  

The ONS also calculates the size of the UK economy relative to the number of people living here. GDP per capita shows whether we are actually getting richer or poorer, by stripping out the impact of population changes. Richard Partington

Assessing the outlook for the public finances and the British economy in a report titled “the trillion-pound question,” the thinktank noted Sunak has previously warned that government spending should not exceed 37% of GDP in normal times.

Speaking in 2015 before his rapid promotion to become one of the youngest chancellors in history, he told the House of Commons: “That [37% of GDP] is the best estimate of our income as a government and therefore the best guide to what we can afford to spend.”

He added: “We all know what happens when those facts are ignored: more borrowing, more debt.”

With just over a fortnight until the crucial first budget of the new parliament set against the backdrop of Brexit, the thinktank said Sunak would probably be handed a modest boost from the Office for Budget Responsibility.

It said the Treasury watchdog would probably lower its estimates for government borrowing by roughly £8bn in 2022-23, giving the chancellor additional headroom within the Tories’ budget rules of around £10bn. It also said the OBR was likely to downgrade its forecast for the size of the economy by 2022 by 0.5% due to several headwinds, including Brexit.

Sunak is thought to be under pressure to relax the party’s budget rules prepared by Javid ahead of the election, which include the government balancing its budget for day-to-day spending by 2023. Borrowing for infrastructure investment should also stay within 3% of GDP.

While suggesting Sunak could just about stay within these constraints while lifting government spending beyond the levels seen under Blair’s Labour government between 1997 and 2007, the thinktank warned it would leave the chancellor with little room for manoeuvre.

It said the headroom would be less than a third of the buffer earmarked by former tory chancellor Philip Hammond. Should public borrowing rise by more than expected, the government may need to raise around £19bn of additional tax income, it added.

Leslie continued: “If the chancellor wants to increase spending on day-to-day public services in a fiscally responsible way he will have to change another of his party’s traditional priorities – lower taxes.

He added: “Higher spending will require higher taxes.”

Source: Read Full Article