The government is exploring ways to soften austerity, the signature economic policy in Britain since the financial crisis, after chancellor Philip Hammond acknowledged voters had grown “weary” of it.
The chancellor said on Sunday that the government had “heard a message last week in the general election” — in which the Labour party made surprising gains with a manifesto that promised an end to tough fiscal policies.
Mr Hammond said that while there were austerity policies that had already been legislated for, the government also had a set of “proposals that we will now have to look at again in the light of the general election result”.
Austerity has been the defining economic debate of the past seven years, with critics of the policy holding it responsible for a lacklustre recovery and mediocre wage growth. Its supporters have countered that borrowing too much would leave the country exposed to a Greek-style crisis.
Conservative MPs have begun to put pressure on the chancellor to reduce or cancel spending cuts after the success of Jeremy Corbyn’s anti-austerity rhetoric caused the government to lose their majority in the House of Commons.
Speaking on the Andrew Marr show, Mr Hammond said that he had already changed the fiscal targets he had inherited when he took on the job and had created “a lot more flexibility to respond to the situation on the ground”, which the government would use if necessary.
However, he also insisted that the government would still bring the public finances into balance by the middle of the next decade and that the country had to “live within our means”.
Mr Hammond also ruled out the possibility of a summer budget and said that “there will be a regular budget in November” in which the government will “set out our future plans for public spending, for taxation, for fiscal balance and everything else that needs to be clear”.
The chancellor said that the UK’s deficit of 2.5 per cent was not sustainable in the near term but that by stretching out the timetable of deficit reduction the government had some “wiggle room”. He also said that the government had “never said we won’t raise some taxes”.
Cutting spending in the next parliament is likely to be difficult given the Conservative’s lack of a majority. Even before the election the Treasury had already worried that cuts had hit their “political limit”.
A further £9bn of savings from the welfare budget have already been legislated for the next parliament, according to an analysis by the Resolution Foundation.
These include freezing all working-age benefits in cash terms for four years, starting in April 2016. This policy is likely to be highly controversial as the fall in the pound since the EU referendum leads to rising prices and lower living standards.
The Institute for Fiscal Studies forecast that median incomes will not grow for the next two years, and that incomes will fall particularly sharply among the poor.
The devastating Grenfell Tower fire could influence the debate. It has become a lightning rod for critics of austerity, who are blaming both a callous attitude to the poor and cuts to local authority budgets for the tragedy. According to the IFS, one in three councils have faced cuts of 30 per cent or more in their spending since 2010.
Another factor in the austerity debate is the Northern Irish Democratic Unionist party, with whom the Tories have been negotiating to form a government.
In their manifesto the DUP ruled out cuts to pensioner benefits, including the winter fuel allowance and the “triple lock” on the state pension, which means it must rise by the higher of 2.5 per cent, the rate of inflation or wage growth. The Tories had planned to drop the triple lock and introduce means-testing for the winter fuel allowance in their manifesto.