SUBSTANTIAL tax rises or better than expected economic growth are needed to achieve the Prime Minister’s aim of ending austerity and the Chancellor’s intention of balancing the books by the mid-2020s, according to a report from a respected think-tank.

The Institute for Fiscal Studies (IFS) said a minimal definition of ending austerity – delivering on promises to increase spending on the NHS, defence and aid – would still need an additional £19 billion a year at today’s prices by 2022-23.

Its Green Budget 2018 said such a spending rise would still leave £7bn of social security cuts working their way through the system, leaving some tough choices for Chancellor Philip Hammond, pictured, right.

The report said borrowing, which has fallen dramatically since its peak in 2009-10, will this year be at its lowest share of national income since 2001-02.

However, the fact that it was £40bn last year posed an ongoing problem, given the Government’s commitment to eliminating the deficit entirely.

The IFS said there was some good news for the Chancellor with borrowing this year potentially around £5bn lower than the Office for Budget Responsibility’s (OBR) £37bn spring forecast and by 2022–23 it might be around £6bn lower than the forecast of £21bn.

This would, however, be a modest revision relative to the amount of uncertainty surrounding the public finances. While headline borrowing is now back to pre-crisis levels, the IFS said public sector net debt, at around £1.8 trillion, is higher than it was by 50% of national income having risen more quickly over the last decade than over any other decade since the Second World War.

It warned that maintaining borrowing at current levels in “good times” could leave debt rising as a share of national income over the longer term.

There would likely be no “Brexit dividend” by 2022-23 and net savings on EU contributions could be less than £1bn a year by then, a “modest saving” that could be eliminated by the need for new spending on administration – for example, border security.

For decades, much of the pressure on key public spending areas has been absorbed by cutting defence and security spending, which accounted for 15% of public spending 50 years ago, but now account for just over 5%.

ICAEW, the Institute of Chartered Accountants in England and Wales, said further cuts to the defence budget are no longer possible if the UK is to meet its NATO commitments.

Citi Research, which collaborated on the report, forecasts more weakness in UK GDP growth for the rest of this year and early 2019 as Brexit uncertainty weighs on business investment. IFS director and editor of the paper, Paul Johnson, said: “The decision over the spending review envelope will probably be the biggest non Brexit related decision this Chancellor will make.

“He has a big choice. He could end austerity, as the Prime Minister has suggested. But even on a limited definition of what that might mean would imply spending £19bn a year more than currently planned by the end of the parliament... Alternatively, the Chancellor could stick to his guns on the deficit and leave many public services to struggle under the strain of a decade and more of cuts.

“He could reconcile these demands by raising taxes, and in principle there are plenty of good options, but the overall tax burden is already high by UK historical standards and he could be constrained by the lack of a parliamentary majority. This is going to be the toughest of circles to square.”

Christian Schulz, chief UK economist at Citigroup, who wrote two chapters in the Green Budget, added: “The slowdown we and other forecasters expected after the 2016 EU referendum did happen, but with a delay. Consumption growth slowed under the pressure of high inflation, while 2018 business investment looks set to be 15% lower than forecast before the referendum.

“As the Article 50 deadline in March next year approaches, more households and business may delay projects, slowing growth even further.

“However, provided the UK and the EU avoid ‘no deal’ a growth rebound in 2019 is likely, and if the transition lasts long enough, even 2% growth by 2020 seems possible.”