By David Milliken
LONDON (Reuters) - British finance minister Jeremy Hunt may have a 30 billion-pound ($36 billion) windfall at next month's budget, but this will be too short-lived to fund permanent tax cuts or public-sector pay rises, the Institute for Fiscal Studies (IFS) said on Tuesday.
The IFS said the fiscal outlook remained much darker than at the time of Britain's last full budget a year ago, and while energy prices had fallen, the weak economic outlook was likely to weigh on the public finances in the longer term.
"That medium-term outlook is what really matters when it comes to making a case for any ... permanent tax cuts or permanent increases to spending," said Isabel Stockton, a senior researcher at the IFS.
Borrowing so far in the 2022/23 financial year has been 31 billion pounds - or 1.2% of annual economic output - below an official forecast made in November when Hunt presented a fiscal update to parliament.
For the next financial year, starting in April, the IFS expects the Office for Budget Responsibility (OBR) to make a downward revision around that size.
That would lower public borrowing for 2023/24 to 110 billion pounds -- still more than twice the 50 billion pounds which the OBR forecast nearly a year ago, before the economic impact of Russia's invasion of Ukraine became clearer.
Hunt announced 55 billion pounds of fiscal tightening in November to placate markets after former prime minister Liz Truss promised unfunded tax cuts. Hunt's squeeze was time-tabled for the back-end of the government's five-year budgeting period.
TAX CUTS OR PAY RISES?
Despite last year's turmoil, Sunak and Hunt are under pressure from some Conservative lawmakers to announce tax cuts again to boost dismal opinion poll ratings ahead of a national election expected in late 2024.
Strikes by healthcare workers, teachers and other public sector employees are also pressuring the government to offer a bigger pay rise than the 3.5% on offer.
The IFS said it would cost an extra 5 billion pounds a year to raise this pay offer to 5.5%, matching the forecast for consumer price inflation for 2023/24 but locking in a big real-terms fall in pay during the current financial year.
While affordable for now, it would raise questions about how to fund such an increase permanently, IFS Director Paul Johnson said.
"There is some money knocking around in the short term. But if you increase pay, that is clearly a permanent increase in spending," he said.
The government's long-term practice of freezing duties on vehicle fuel - which is meant to rise in line with inflation - costs around an extra 6 billion pounds each year, he added.
Johnson said an easier win for Hunt than a bigger public sector pay deal might be keeping the current level of household energy subsidies, which are due to fall in April before being fully phased out. Holding them at their current level would cost 2.7 billion pounds, based on current energy price forecasts.
($1 = 0.8323 pounds)