The Government's borrowing requirement varies so much over the economic cycle that even apparently low levels of borrowing do not mean there is room for tax cuts or additional spending, the Institute for Fiscal Studies said yesterday.
The IFS said Treasury research showed that higher or lower than expected economic growth explained much of the average error of pounds 8bn in forecasting the annual public sector borrowing requirement (PSBR).
Researchers found that a consumer-led boom such as the current one flattered the public finances more than an export-led boom on the same scale. Equally, the PSBR will deteriorate faster if consumer spending dominates the slowdown in growth.
The results provide welcome support for the Chancellor's insistence that prudent management of the nation's finances is essential despite the huge pressures for additional spending on front-line public services.
However, the IFS said pressure for higher public expenditure would make it difficult to pay for tax cuts in future. IFS economists Christopher Giles and John Hall concluded that the projected decline in the share of government spending in the economy in Treasury forecasts was "inconsistent with the current Government's aim of meeting the public's demands for decent public services by improving the quality and level of provision."
The Government will in the future face a tough decision between limiting the growth in spending on health, education and social security or accepting that the size of government will once again grow as a share of GDP.Reuse content