Chancellor facing an £84 billion black hole in public finances

Chancellor Philip Hammond is facing an £84 billion black hole in public finances fuelled by Brexit in next month’s mini-budget, according to the the Resolution Foundation which is forecasting that the economy will be £60 billion smaller in 2020 than was expected before the referendum.

In its report, the think tank says Hammond is likely to face an £84 billion borrowing gap over the next five years when he delivers the Autumn Statement on November 23.

Matt Whittaker, chief economist at the Resolution Foundation, said: “Despite the long-term impact of Brexit remaining very uncertain at this stage, there is a strong consensus among economists that post-referendum uncertainty will lead to deterioration in the public finances, which were coming in below expectation even before the referendum.

“We won’t know the OBR’s verdict until November 23 but our analysis shows that the Chancellor may face a new £84 billion borrowing black hole and the prospect of breaking the fiscal rules inherited from his predecessor. Rather than announcing very significant further tax rises or spending cuts in the face of renewed economic headwinds, the Chancellor is right therefore to press the fiscal reset button and set a new economic course for the remainder of the parliament.

“The good news for Philip Hammond is that by softening his fiscal target he has significant political and economic room for manoeuvre. The leeway created by a new set of fiscal rules could afford the Chancellor the opportunity to make his mark on two key themes of the new government – boosting investment and helping ‘just managing families’ by reversing the social security cuts that are set to squeeze their incomes.

“But the trade-off for this approach is significantly higher borrowing in the coming years. The Chancellor will need to decide if that is a price he is prepared to pay for adjusting to new economic times and setting out a direction for the new government.”