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IFS report warns of difficult choices for the Chancellor

Deficit remains extraordinarily high at 7.7% of GDP, the third highest deficit since WWII

The Institute for Fiscal Studies (IFS) has launched its annual Green Budget report, setting out its views on the prospects for the economy and the public finances ahead of the spending review and autumn budget scheduled for 27 October 2021.

According to the IFS, the economic and fiscal outlook is better than predicted in March, but still “much worse” than pre-pandemic forecasts with the deficit in 2021-22 to be £180bn, over £50bn below OBR spring budget forecast.

The report also revealed deficit remains extraordinarily high at 7.7% of GDP, the third highest deficit since WWII, showing the damage Covid-19 has had on the economy.

Higher interest rates and inflation have increased debt interest costs to around £15bn a year more than expected in March

The IFS said the chancellor faces an “unpalatable” set of spending choices, with spending £3bn a year smaller than pre-pandemic plans, which is a problem when 64% of departmental spending is “already protected or otherwise committed.”

Potential cuts could take place in “unprotected budgets” such as local government, prisons, further education and courts of £2bn in 2022-23.

Alison Ring, director for Public Sector and Taxation at ICAEW, said: “As ever, the IFS have produced one of the most authoritative analyses of the state of the UK public finances, setting out many of the difficult choices facing the Chancellor in the spending review and autumn budget.

“The challenge for the chancellor will be how to address severe spending pressures across central and local government and deliver on ‘levelling up’ and ‘net zero’, at the same time as repairing the public balance sheet and charting a path towards sustainable public finances.”

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