A tax raise of approximately £40bn is needed each year for the UK government to maintain its current spending rate and reduce the deficit by 2020, the Institute for Fiscal Studies has calculated.
This comes after Philip Hammond's spring statement on 13 March where he held out the prospect of increases to public spending as he set out improved short-term figures for UK economic growth and the public finances, including lower than expected government borrowing in 2017-18.
Hammond said there was “light at the end of the tunnel” since the OBR revised up its prediction for GDP growth in 2018 to 1.5% from 1.4% and the country would start to run a small current surplus.
Paul Johnson, director of the Institute for Fiscal Studies (IFS), was less optimistic and pointed out that UK's growth prospects were among the worst in the G20.
In order to avoid further cuts to spending, the IFS calculated a £14bn per year would be needed from the middle of the parliament and another £18bn in extra taxes from 2023 to 2025 each year to cut the deficit, with additional demographic pressures potentially adding another £11bn a year to cover the additional demands for health, pension and social care spending.
The IFS said that the UK is still trying to recover from the 2008 financial crisis and this climb has proven to be the worst out of all major economies post-crisis, with the slow economic growth has worsened living standards.
Growth expectations were much higher in 2008. GDP per capita for 2018 was forecast in 2008 to be £8,600 but the reality is £5,900 per head. There is a 14% gap between the economy expected in 2008 and the reality.
“The economy is at least £300bn smaller than we might have expected based on 2008 forecasts. Yet we are now supposed to be at capacity, with no potential to make up for any of that loss,” said Johnson.
He also said that there would be a problem in balancing an increase in spending and a desire to cut deficit by the mid 2020s.
The recession caused a huge spike in borrowing which was larger than expected, it accounts for 10% of the national income. This generates public sector debt that has reached twice the 2008 level.