UK public services face post-Brexit squeeze, forecasters warn

LONDON (Reuters) - Many British public services risk ongoing real-terms cuts for years to come, despite a softer fiscal stance from finance minister Philip Hammond, a major think tank predicted ahead of a half-yearly budget update next month.

FILE PHOTO: Britain's Chancellor of the Exchequer Philip Hammond visits Sensor City in Liverpool, Britain, February 1, 2019. REUTERS/Andrew Yates/Pool/File Photo

The Institute for Fiscal Studies (IFS) expects Hammond to give more details of the money available for a multi-year review of public spending when he updates budget plans on March 13, just two weeks before Britain is due to leave the European Union.

In his annual budget in October, Hammond loosened the government’s purse-strings, giving support to the economy as it slowed ahead of Brexit. However, rising healthcare spending leaves little spare for other public services, the IFS said.

“This suggests yet more years of austerity for many public services -- albeit at a much slower pace than the last nine years,” IFS research economist Ben Zaranko said.

Public services outside of health, defence and overseas aid saw budgets fall by an average of 3 percent a year in real terms after 2010, and now look set for declines of 0.4 percent a year in inflation-adjusted terms going forward, the IFS predicts.

“The (finance minister) has said that the Spending Review will take place in 2019, and that is the right moment for government to make long term funding decisions,” a spokesman from the finance ministry said in a statement.

“Outside the (health service), total day to day departmental spending is now set to grow in line with inflation, and public investment will reach levels not sustained in 40 years in this parliament.”

Due largely to the global financial crisis, Britain’s budget deficit peaked at nearly 10 percent of gross domestic product in 2009/10 -- one of the highest in the world at the time -- but is roughly on track to drop to 1.2 percent this year.

In November, Hammond said he hoped a “double deal dividend” from successful Brexit talks would free more money for public services in the multi-year spending review due in 2019.

However, with less than two months before Brexit, Prime Minister Theresa May has failed to persuade lawmakers to back the deal she brokered with Brussels, putting Britain at risk of a disorderly exit that businesses fear would be highly damaging.

“In the short run ... government might well raise spending to support the economy, mitigate the impacts for the worst-hit sectors or areas and provide funding to departments now required to perform additional functions, notably at the border,” the IFS said.

In the long run, higher taxes or further spending cuts would be required to pay for this spending, as well as to compensate for weaker growth caused by trade restrictions, the IFS added.

Most economists, including those for the British government, estimate Brexit uncertainty has damaged the economy already and will slow growth further over the long term, even with a deal.

Last week the Bank of England estimated the costs to date at 1.5 percent of GDP -- more than the forecast budget deficit for 2018/19.

During 2016’s referendum campaign, Brexit supporters including former foreign minister Boris Johnson said leaving the EU would free as much as £350 million a week to spend on public services such as healthcare.

(This story corrects an earlier version of paragraph 3 to change the month from November to October)

Reporting by David Milliken, editing by Andy Bruce