Britain's debt will not fall to 2008 levels until 2060s, IFS says in startling warning

Respected thinktank also warns of 'lost decades' without earnings growth in critical analysis of Chancellor Philip Hammond's Budget

Lizzy Buchan
Political Correspondent
Thursday 23 November 2017 14:03
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Philip Hammond on Downing Street ahead of the 2017 Budget Statement
Philip Hammond on Downing Street ahead of the 2017 Budget Statement

Britain's debt levels will not fall below pre-crisis levels until the 2060s if growth does not improve, the head of the Institute for Fiscal Studies (IFS) has said in a critical assessment of the Budget.

IFS Director Paul Johnson said workers were facing two "lost decades" without earnings growth in response to Chancellor Philip Hammond's statement yesterday.

Despite a £25bn giveaway for housebuilding, tech and the NHS, the IFS said the Budget did not mark the end of the "age of austerity" as it pointed out that other public services outside the NHS will still face 7 per cent cuts in day-to-day spending over the next five years.

Delivering the IFS' post-Budget analysis, Mr Johnson said: “The sort of modest growth rates currently expected imply that if we were to maintain the deficit at the just over 1 per cent of national income projected for the early 2020s, it would take us well past the 2060s for debt to fall to its pre-crisis levels of 40 per cent of national income.

“That assumes no recessions for the next half century.”

Grim forecasts from the Office for Budget Responsibility (OBR) will amount to a £65bn hit to the economy as GDP per head will be 3.5 per cent lower in 2021 than was forecast less than two years ago, he said.

Average earnings in 2021 look set to plunge to £1,400 lower than forecast in March 2016 - which is lower in real terms than at the time of the financial crash in 2008.

Mr Johnson added: "We are in danger of losing not just one but getting on for two decades of earnings growth."

The Chancellor attempted to put a positive spin on progress to reduce net debt and abolish the deficit during his set-piece statement on Wednesday but lagging productivity and Brexit remain major stumbling blocks for the ailing economy.

The OBR's downgrade of growth forecasts for the next five years means Mr Hammond's chances of hitting his target to balance the nation's books by the middle of the 2020s look "remote", said the IFS.

With nearly £12 billion of welfare cuts still to work their way through the system and day-to-day public spending due to be 3.6 per cent lower in 2022/23 than it is now, "this is not the end of austerity, not by a long chalk", said Mr Johnson.

He said: "The figures published yesterday imply yet one more year of spending restraint.

"As the years go by, the end of austerity keeps slipping out of view."

Low GDP growth will impact on Britain's ability to pay off its national debt, said Mr Johnson.

The OBR's decision to downgrade projected annual productivity growth from 1.7 per cent to 1 per cent was "as likely to be too optimistic as to be too pessimistic", he said.

The UK is growing more slowly than all other advanced economies and projected to experience growth "well behind" all the other G7 countries over the coming years, with the OBR suggesting it will not top 1.6 per cent for the next five years.

Mr Johnson said: "It really is time to start forgetting that for decades anything less than 2 per cent was considered seriously disappointing.

"The sorts of modest growth rates currently expected imply that, if we were to maintain the deficit at the just over 1% of national income projected for the early 2020s, it would take us until well past the 2060s for debt to fall to its pre-crisis levels of 40% of national income.

"That assumes no recessions for the next half century."

The gloomy IFS assessment came as another thinktank, the Resolution Foundation, warned that living standards could face their biggest squeeze since records began in the 1950s and productivity growth is set to be the worst since the early 1800s.

Additional reporting by PA.

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