With productivity stagnant, the Chancellor may have to scrap public spending plans and increase borrowing. Tory economic legitimacy will be in tatters.
Chancellor Philip Hammond is stuck “between a rock and a hard place” in trying to cut the deficit and respond to pressures to increase public spending, a leading economics think tank said this morning. This really is where the wheels could come off for the Tories.
The Chancellor is “trapped” between the Tory’s targets to reduce the deficit and growing political pressures to increase spending on public services, whilst a fall in productivity forecasts threatens both political projects, the Institute for Fiscal Studies (IFS) said today.
“It is hard to see how the Chancellor can both maintain the credibility of his fiscal targets and respond effectively to the growing demands for spending”, the IFS said.
At a time when government debt reduction is increasingly seen as a failed economic project, Hammond may seek to continue austerity just to save political face — as seems to have been the plan for the past several years, but there’s a new obstacle.
It was revealed earlier this month that the UK may be suffering a significant drop in productivity and growth, decimating tax receipts and government spending plans — if this comes to pass, Tory economic legitimacy will evaporate.
The Office for Budget Responsibility (OBR) says that productivity gains may have been overestimated for a decade, and productivity may never have recovered from pre-2008 levels. This in itself demonstrates the failure of Tory economic policy but its ramifications could be even greater.
If this forecast is correct, the £26bn public finances ‘headroom’ built up by the Chancellor, which he had planned to allocate in the budget, will have to be cut by a third.
At a time when 48 per cent of the public now support more spending and higher taxation (up from 32 per cent in 2010), more austerity looks like political suicide for the Tories.
But even with public spending cut, the deficit would continue to grow: almost doubling to £36bn over the next three years. The central tenant of the Tory’s economic policy — deficit reduction — would be in tatters.
The author of the IFS report, Thomas Pope said:
“Mr Hammond has been dealt a very tricky hand indeed… It looks like he will face a substantial deterioration in the projected state of the public finances… he faces even greater than usual levels of economic uncertainty.”
If the predictions come to pass, the Tories would preside over an economy in free-fall, a growing deficit and crippling austerity measures which become more unpopular by the day.
The Tory’s claim to be the fiscally responsible party, in this scenario, would be ruined, the government’s position would become untenable and austerity would be exposed not just as socially regressive, but also economically foolish. It will be the job of progressive parties to step in and champion an end to austerity and public spending to get the economy working again.
Oscar Webb is a staff writer for Left Foot Forward. He tweets here.Like this article? Sign up to Left Foot Forward's weekday email for the latest progressive news and comment - and support campaigning journalism by making a donation today.