UK spending plans could prove unsustainable, think tank warns

[LONDON] UK Chancellor of the Exchequer Sajid Javid risks rushing into unsustainable commitments in his spending review this week, a leading think tank warned.

Mr Javid is due to announce a one-year plan on Wednesday against a backdrop of heightened uncertainty, as lawmakers opposed to a no-deal Brexit prepare to mount a final push to stop Britain crashing out of the European Union on Oct 31.

The allocation will include extra money for policing, health and education, and Mr Javid has promised to keep to existing fiscal rules requiring that structural borrowing is below 2 per cent of GDP in 2020-21 and that government debt falls as a share of the economy.

But in a report published Monday, the Institute for Fiscal Studies warned that the government is set to promise spending increases without knowing how the economy will fare after Brexit.

"Making big fiscal announcements in a period of great economic uncertainty means we will have little idea how sustainable or costly decisions made this week will be," said IFS Director Paul Johnson.

The IFS put the additional spending commitments made since the Office for Budget Responsibility published its March forecasts at between £4 billion (S$6.7 billion) and £5 billion.

All else being equal, this would be easily affordable, as the OBR estimated that Britain had £15 billion of "headroom" to increase borrowing next year before breaching the deficit rule.

However, growth has slowed since the spring and spending is rising more quickly than forecast, while a disruptive no-deal Brexit could blow a £30 billion hole in the public finances, the IFS said.

The OBR won't be publishing new forecasts this week, meaning Mr Javid will need to wait until the Autumn Budget to discover whether the watchdog deems his plans consistent with the fiscal mandate.

BLOOMBERG