The UK chancellor’s public expenditure largesse has put the long-term health of the government’s finances in question, the Institute for Fiscal Studies warned on Monday as the Treasury vowed to proceed with its spending round despite the nation’s political turmoil.
The Treasury said that Sajid Javid needed to press on with his spending round on Wednesday to give local authorities and government departments budgets for next year — and sufficient time to implement them.
But with announcements of funding increases for schools, police, hospitals and local government in recent days, a growing number of economists have voiced concern that Mr Javid has lost control of the public finances under pressure from 10 Downing Street.
The Treasury insisted that the chancellor’s statement would meet the government’s fiscal rules to keep underlying public borrowing at less than 2 per cent of national income and debt falling in 2020-21.
This was reinforced last week by the prime minister, who committed the government to “continue to keep debt coming down every year”.
But on Monday the IFS joined fellow think-tank the Resolution Foundation in warning that the government’s flurry of spending pledges was putting this commitment in jeopardy.
Paul Johnson, director of the IFS, said: “Making big fiscal announcements in a period of great economic uncertainty means we will have little idea how sustainable or costly decisions made this week will be”.
Mr Johnson also criticised the Treasury’s decision to separate the spending round from a new public finance forecast by the Office for Budget Responsibility, which would independently test the government’s claims to be fiscally prudent.
While the Treasury will publish spending plans for all government departments and local government in 2020-21 this week, it has not yet finalised how it will stay within its fiscal rules.
“Fiscal events and forecasts should occur together if we are to maintain faith in a fiscal framework which has served us well in terms of transparency since it was introduced in 2010,” Mr Johnson said.
The spending round document is likely to show that total government outlays would not increase sufficiently to break the rules, and would just be an update of the OBR’s Spring Statement figures.
However, since the Spring Statement in March, the economic outlook has darkened, with weaker growth and signs in the latest monthly data that the government was spending much faster than expected.
The Treasury’s room for manoeuvre has also shrunk after the Office for National Statistics’ acceptance that a 2018 change to the government’s accounting procedures for student loans may have eaten into the government’s fiscal headroom.
The spending round is, however, set to offer the largest increases for government departments since the financial crisis in 2008.
All forecasts of the public finances to date have been based on the assumption of a Brexit deal with the EU. Under a benign no-deal scenario, the OBR warned in July that borrowing would increase by £30bn a year.
The spending round is scheduled to be announced in a statement to the House of Commons on Wednesday but could be delivered in other forms such as a written statement, officials said.
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