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Philip Hammond faces ?41bn black hole in Government spending, warns IFS

Britain is heading for a ?41bn financial black hole as the sustained failure to balance the books combined with an ageing population and new hints of extra spending leave the Chancellor facing tens of billions of pounds of further tax rises or spending cuts.
Such a substantial gap would need to be filled by a hike of 5p on the basic rate of income tax, the Institute for Fiscal Studies said, or equivalent spending cuts or borrowing - if Philip Hammond is prepared to miss his deficit target.
On the current fiscal path another ?18bn of tax rises or spending cuts are needed to balance the books by 2025, the IFS said.
Philip Hammond faces ?41bn black hole in Government spending, warns IFS

That cost rises to ?30bn per year if Mr Hammond wants to keep Government spending steady as a share of GDP over the same time period.
On top of that the UK’s ageing population will increase demand for services such as healthcare and pensions, adding an extra ?11bn to the bill.
Mr Hammond gave an upbeat assessment of the economy’s prospects yesterday, highlighting the falling deficit and strong jobs growth.
The recovery means more spending could be on the table later this year, the Chancellor said in his Spring Statement.
“If, in the autumn, the public finances continue to reflect the improvements that today’s report hints at, then... I would have capacity to enable further increases in public spending and investment in the years ahead while continuing to drive value for money to ensure that not a single penny of precious taxpayers’ money is wasted,” he said.
But the Chancellor is not currently on track to balance the books by 2025, making this plan tough to achieve without radical action.
Philip Hammond faces ?41bn black hole in Government spending, warns IFS

Paul Johnson, director of the IFS, said a 5p increase on the main income tax rate would be required if the Government were to opt for tax increases to plug the gap.
Increases in National Insurance contributions would be an alternative way of meeting the figure.
However, he added that it was more probable that the Government would resort to more borrowing, adding that a 5p hike would be unlikely.
Discussing how the money could be raised, Mr Johnson said: “One answer... would be income tax rates, although we haven’t done that since the mid 1970s. We could put up National Insurance rates, or we could up the VAT rate, or the base could be expanded.”
Asked if increasing taxes was possible politically, Mr Johnson added that the surprise surge by Jeremy Corbyn had shown that a growing percentage of the electorate supported higher taxation.
“We’ve got two parties who want to have European levels of social spending and American levels of tax. Is it possible to increase taxes? Well the Labour Party got an awful lot of votes for promoting an increase in tax and it seems to me that it is politically possible,” he said.
“If you look at our European neighbours, tax burdens are considerably higher. So it is perfectly possible to have higher levels of tax.”
Philip Hammond faces ?41bn black hole in Government spending, warns IFS

The tax and spending authority also launched an attack on the way the numbers have been presented by both the Conservatives and Labour.
“The reality of the economic and fiscal challenges facing us ought to be at the very top of the news agenda,” Mr Johnson said.
“The reality, not the spin and bluster of politicians on all sides pretending there are easy solutions, that the promised land is just around the corner, or that they can reinvent the laws of economics. There aren’t. It isn’t. And they can’t.”
The deficit also excludes student loans, which are added to the national debt but do not appear in the annual borrowing sums.
As a result the IFS noted that it would be possible for the Government to record a deficit of zero - effectively balancing the books - at the same time as student loans, which will not all be repaid, add ?30bn to the national debt.
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