March 14, 2018 / 12:23 PM / 5 months ago

UK think tank sees no easy solutions to UK fiscal woes

LONDON (Reuters) - Politicians must stop deluding themselves that all is well for Britain’s economy and finances as it prepares to leave the European Union, the head of the non-partisan Institute for Fiscal Studies said on Wednesday.

A Union Flag umbrella is seen in front of the Elizabeth Tower, commonly known as Big Ben, in London, Britain, August 9, 2017. REUTERS/Hannah McKay

Britain’s public finances have performed better than expected over the past year — pushing borrowing to its lowest since 2002 — but IFS director Paul Johnson said politicians on all sides had not grasped the huge challenges that lie ahead.

“The reality of the economic and fiscal challenges facing ought to be at the very top of the news agenda,” Johnson said in a speech in London.

“And I mean 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,” Johnson said. “There aren’t. It isn’t. And they can’t.”

The IFS is widely regarded as a non-partisan arbiter of British fiscal policy and its responses to government budget statements are closely watched by national media.

Johnson’s comments came a day after finance minister Philip Hammond presented somber projections for the economy from the independent Office for Budget Responsibility in a half-yearly budget update, but said he aimed to surpass them.

OBR chairman Robert Chote was Johnson’s predecessor as director of the IFS.

Britain's Chancellor of the Exchequer Philip Hammond leaves 11 Downing Street to deliver his half-yearly update on the public finances, in London, March 13, 2018. REUTERS/Toby Melville

The OBR’s forecasts were little changed from November, when it downgraded its medium-term outlook, mostly because productivity has stagnated since the financial crisis, rather than specific concerns about Brexit.

Hammond’s announcement on Tuesday that he would begin consultations on the future of some taxes was welcome, but did not adequately address the problems ahead, Johnson said.

Just to maintain public spending’s share of the economy in five year’s time, Hammond would need to find an extra 14 billion pounds ($19.6 billion) a year, Johnson said.

If Hammond also wanted to pursue his goal of eliminating the budget deficit by the mid 2020s, Hammond would need to find another 18 billion pounds a year of spending cuts and tax rises.

Demographic pressures on spending on health, social care and pensions could add another 11 billion pounds a year by 2025, the IFS said.

In addition, Britain is becoming more reliant on a small number of high-earning taxpayers to finance public spending. While this may be desirable in terms of distribution between rich and poor, there are risks, Johnson said.

“If high-paid jobs - and EU citizens, who are well represented among high earners in the UK - relocate elsewhere, the consequences for the exchequer will be severe,” Johnson said.

($1 = 0.7152 pounds)

Reporting by Andy Bruce, editing by Larry King

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