Government spending risks national debt at highest since 1960s

by Tom Bailey from Money Observer |

A raft of so-called fiscal giveaways announced in the September Spending Round would amount to 1% of national income.

A no-deal Brexit combined with an increase in government spending could see national debt climb to highs not seen since the 1960s, according to the Institute of Fiscal Studies (IFS).

According to the IFS's Green Budget Report for 2019, a raft of so-called "fiscal giveaways" announced last month by chancellor Sajid Javid would amount to 1% of national income, and push government spending to above historical averages over the next five years. 

The think-tank notes:

"With a permanent fiscal giveaway of 1% of national income (£22 billion in today's terms), borrowing would reach a peak of 2.8% of GDP in 2022–23." 

That scenario, however, is envisioned as taking place under a "smooth Brexit." Should the government fail to secure a Brexit deal, those figures could rise dramatically. 

The report warns:

"Even under a relatively orderly no-deal scenario, and with a permanent fiscal loosening of 1% of national income, the deficit would likely rise to over 4% of national income in 2021–22."

As a result, debt would climb to almost 90% of national income for the first time since the 1960s, the report warns. The report also warns that future governments would have to reimpose austerity in order to bring spending and debt back to sustainable levels. 

Alongside promises to increase the spending, the prime minister has previously proposed new tax cuts. During the Conservative Party leadership race he floated the idea that threshold for the 40% tax rate from £50,000 to £80,000. Johnson has also suggested raising the level at which national insurance contributions need to be paid from £8,600 to £12,500. 

At the time, the IFS warned that the combined cost of the two tax cuts would total £20 billion. 

According to the IFS:

"Even if a Brexit deal is secured, there would be a strong case for the chancellor to resist any calls for a substantial package of permanent tax cuts or further increases in day-to-day spending unless these are to be covered by tax rises of a similar size."

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

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