Under current plans, the tax burden will rise to its highest level as a proportion of national income for 30 years, while spending will fall to 13% below its 2010 level by the end of the decade, after inflation is taken into account, said the Institute for Fiscal Studies (IFS).
In a gloomy assessment of the UK’s economy, the IFS’s annual Green Budget warned that Chancellor Philip Hammond will have to find an extra £34 billion from tax rises or spending cuts unless he ditches his target of eliminating the state deficit before 2025.
And the document warned that Theresa May’s Brexit strategy of taking the UK out of the single market and imposing immigration controls is likely to leave the UK’s economy 3% smaller by 2030 than if Britain had voted Remain.
If she fails to reach a free trade deal with the remaining EU, the outcome will be “worse still”.
Warning that exports will be hit by new customs and regulatory barriers outside the single market, Andrew Goodwin of Oxford Economics said: “Over the longer term we think the Government’s chosen path for Brexit is one of the more economically damaging.
” The only outcome that we have studied that would be worse than what the Government has chosen would be us not having a trade agreement at all and falling out on World Trade Organisation terms.”
Forecasts by Oxford Economics put UK GDP growth at a “relatively disappointing” 1.6% in 2017 and 1.3% in 2018, largely due to higher inflation caused by sterling’s collapse after the Brexit vote.
Workers face an “unprecedented” decade without real wage growth, as pay rises slow to 0.2% above inflation in 2017, down from 1.7% in 2016.
And the four-year squeeze on benefit levels will become “more painful” as inflation rises.
IFS director Paul Johnson said that, despite the focus on Brexit, the largest impact on the public finances over the coming period would be spending cuts and tax rises inherited by Mr Hammond from his predecessor George Osborne.
“Even so the new Chancellor may not find it all that easy to meet his target of eliminating the budget deficit in the next Parliament,” he said.
The independent think tank warned that Britain is on course for an unprecedented 15 years of spending cuts and lost pay growth, with a date for meeting an overall Budget surplus being pushed back to 2025.
“The big picture from yesterday’s Budget is that the big squeezes on both the public and family finances have been prolonged well into the 2020s,” said Torsten Bell, director of the Resolution Foundation.
“The focus on good news this year has hidden the fact that the Office for Budget Responsibility (OBR) has stuck to its pessimistic guns from the Autumn Statement about the fate of Brexit Britain’s economy.
“The weak medium-term outlook for borrowing means we’re still only halfway through the fiscal consolidation that was supposed to have finished by now.
“And while the OBR at least delivered some good news on borrowing, the family finances picture has actually deteriorated since the autumn. Britain is set for a return to falling real pay later this year, with this decade now set to be the worst for pay growth since the Napoleonic wars.”
He added: “Some households will feel the pinch more than others. The combination of weak pay growth and over £12bn of benefit cuts means that for the poorest third of households this parliament is actually set to be worse than the years following the financial crisis.”
The Resolution Foundation’s analysis found, among other things, that real average earnings are only set to return to their pre-crisis peak in 2007 in by the end of 2022 and this is set to be the worst decade for pay growth for 210 years, with lost pay growth of £12,000 ($14,591) by 2020.
The research comes as Hammond faces a backlash over a hike to National Insurance Contributions (NICs) from the self-employed.
The row is over the Chancellor’s plan to scrap class two NICs for self-employed workers from April 2018 and increase the main rate (class four) of NICs by 9% to 10%, with an additional 1% hike in April 2019.
The levy hike will cost more than 2.4 million self-employed workers £240 a year. “It’s only right and fair we should take a small step to closing the gap between the treatment of employed and self-employed people,” Hammond told Sky News.
“No conservative likes to increase taxes, National Insurance, anything else. But our job is to do what needs to be done to get Britain match-fit for its future.”
The Treasury had not responded to a request for comment at the time of publication.