Chancellor told he is gambling with public finances and will be unable to balance books.
Philip Hammond has been told Britain needs to overhaul the tax system to raise more money for the NHS after using the budget to hand tax cuts to the rich while raising public borrowing.
Urging the chancellor to conduct a formal review of taxation alongside the government’s planned spending review next year, the National Institute of Economic and Social Research said Hammond would be unable to balance the books in future without finding extra tax revenue.
Jagjit Chadha, the director of NIESR, said public spending on health would need to rise significantly to accommodate Britain’s ageing population by the middle of this century. Without raising more money from tax, this could generate “some very scary numbers” for the national debt.
“Once you start thinking about that, you need to think about raising revenues,” he said. “It’s almost a cross-party consensus not to talk about taxes. But if we can change the dialogue that taxes are a way of sharing risk, then we can raise them in an appropriate manner. It’s the appropriate dialogue.”
The chancellor used the budget on Monday to outline how the Treasury would find £20bn in additional funds for the health service by 2023-24 but made few significant changes required to raise more revenue. He was criticised for delivering tax cuts that analysts said would benefit the richest in society most.
He was able to do so after the Office for Budget Responsibility, the government’s tax and spending watchdog, revealed an £11.9bn improvement in the public finances this year, which the chancellor opted to spend in its entirety.
The Institute for Fiscal Studies, the UK’s leading tax and spending thinktank, said on Tuesday that the chancellor’s approach constituted a “bit of a gamble” with the public finances because the short-term boost for the government’s coffers could quickly evaporate.
It said there was a one in three chance that Britain’s finances would deteriorate sharply next year, and significant risks to the UK economy posed by Britain crashing out of the EU without a deal. Both could cause Hammond to ditch his current spending plans, the IFS said.
Moody’s, the ratings agency, also said on Wednesday that the chancellor had ducked difficult questions about how to pay for the NHS and the growing pressures on the public purse from an ageing society.
“While this [£20bn for the NHS] spending commitment addresses significant political pressure that has built up over the years, it does not address the fundamental long-term weakness of UK fiscal policy that comes from healthcare spending,” Moody’s said.
The NIESR’s analysis published on Wednesday suggests the UK has usually opted to spend less on public services and bring in less from taxation as a proportion of GDP compared to other major advanced economies.
It said successive governments after the first and second world war had typically raised taxes to respond to higher spending, which was required because of the shock to the economy from war. The 2008 financial crisis represented the greatest hit to peacetime economic activity, and was followed by large fiscal stimulus, but taxes in the past decade have not risen to smooth the public finances.
The NIESR said it would be difficult for the chancellor to eliminate the deficit, the annual gap between public spending and tax income, through any single tax measure. The thinktank said this was a further reason for holding a comprehensive tax review.
“We recommend that the government undertakes a comprehensive review of taxation and how it charges for public services, such as adult social care, with the aim of raising revenue more efficiently and equitably than it does at present,” it said.