LONDON (Reuters) – British finance minister Philip Hammond will probably say next month that he will miss a key budget target because he will not be able to squeeze spending as much as he planned, a leading think-tank said on Wednesday.
Hammond, trying to reassure investors that he will tackle Britain’s high public debt levels even as Brexit nears, says he wants to hold the underlying budget deficit below 2 percent of the country’s economic output in the 2020/21 financial year.
But he is also under pressure to ease the strain on hospitals and other public services, while some welfare reforms are on hold due to their impact on poorer households.
The National Institute of Economic and Social Research said Hammond would probably have to relax his target or drop it when he makes a half-yearly budget statement on March 13.
Last October, Hammond softened planned cuts to total managed expenditure — expressed as a share of gross domestic product — as he promised voters that an end to austerity was in sight.
But even that gentler squeeze on spending would probably be too hard to achieve, NIESR said.
“There are clearly demands on the social infrastructure of the economy that go beyond what would be feasible within the current envelope of the fiscal rule,” NIESR director Jagjit Chadha said.
Hammond’s job will also be made harder by the impact on the public finances of a decision by official statisticians to reclassify student loans, NIESR economist Amit Kara said.
Hammond has other public finance targets including steadily bringing down public debt as a share of gross domestic product.
NIESR cut its forecast for British economic growth in 2019 to 1.5 percent from a previous estimate of 1.9 percent, citing a slowdown in the economy at home and globally.
The forecast was based on the assumption that Britain avoids the shock of a no-deal Brexit next month, something Prime Minister Theresa May says could happen if the European Union refuses to give her more concessions on the Irish border issue.
In the event of a no-deal Brexit, the economy would grow by about 0.5 percent this year, assuming the Bank of England lowers interest rates, the government cuts taxes and increases welfare spending, and Britain and the EU find ways to reduce the shock in key areas such as finance and transportation, NIESR said.