Hammond Facing 25 Billion-Pound Hit to U.K. Budget, IFS Says

(Bloomberg) -- U.K. Chancellor of the Exchequer Philip Hammond is facing a 25 billion-pound ($31 billion) hole in the public finances following the Brexit vote, the Institute for Fiscal Studies warned.

Diminished growth will result in 31 billion pounds of lost tax revenue, only partially offset by a 6 billion-pound reduction in spending if Britain ceases to contribute to the European Union budget, the non-partisan research group said in a report published on Tuesday. It means the U.K. is heading for a deficit of 14.9 billion pounds in 2019-20 instead of the 10.4 billion-pound surplus predicted in March by former chancellor, George Osborne.

The report comes as Hammond prepares to announce his new fiscal plans on Nov. 23. While the economy has shown unexpected resilience since the June decision to leave the EU, growth is forecast to slow sharply next year and Hammond has warned that any fiscal stimulus will be limited. 

“The new chancellor's first fiscal event will not be easy,” said Thomas Pope, an economist at the IFS. “Any decisions to increase spending or cut taxes in the short run should be taken in the knowledge that significant further austerity after 2020 looks to be on the cards.”

The findings, which echo the warnings made by the IFS in the run-up to the June referendum, could also add pressure on Prime Minister Theresa May to ensure that the U.K. remains a member of the EU single market as she prepares to begin separation negotiations.

‘Strong' Economy

When asked for her views on the IFS study, May said that the fundamentals of the British economy are “strong” and vowed to maintain discipline over the public finances.

“We've seen our deficit reduced by two-thirds,” she said in a BBC interview on Tuesday, while on a trade mission to India. “We are determined to continue to live within our means; of course we have seen in recent weeks some of the economic data for this year being revised upwards in terms of GDP. But what matters is us taking the opportunities that are now open to us to develop trade around the world.”

Hammond has insisted that the goal of erasing the deficit has been postponed, not abandoned. But even if a balanced budget was achieved and maintained from 2020-21, debt would not fall below the pre-crisis level of 40 percent of national income until the mid-2040s, the IFS warned. 

With the Tory government having failed to deliver on any of the three fiscal targets it set itself little more than a year ago, Hammond should be “cautious” in proposing new ones, the IFS said. “A good set of fiscal targets will be forward-looking and flexible,” with one option being a return to an early Osborne goal of limiting borrowing to the amount needed for investment, it said.

The report said that an aging population, reduced immigration and a potential increase in interest rates could also compound the government's fiscal headache beyond the current parliamentary term.

--With assistance from Tim Ross To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net. To contact the editors responsible for this story: Eddie Buckle at ebuckle@bloomberg.net, Andrew Atkinson, Kevin Costelloe