IFS on May’s ‘birthday present’: There is no Brexit dividend

Theresa May hit the headlines today with her promise of a £20 billion increase in NHS funding, or £384 million per week, supposedly paid from the ‘Brexit dividend’.

But Paul Johnson, Chief Economist at the IFS has a rather different view. He’s pointed out that the official government forecast of Brexit suggest that it will result in a net loss of £15 billion, or £300 million per week.

Johnson took to twitter to set the record straight:

“Extra spending can't be funded by Brexit dividend. 1) Govt has accepted Brexit will *weaken* public finances by £15bn [per annum]. 2) Financial settlement with EU plus commitments to replace EU funding already uses up all of our EU contributions in 2022. There is no Brexit dividend.”

All this is not to say that increasing NHS funding by £20 billion, or more, isn’t possible or to be welcomed. But it won’t come through some boost to the treasury from the end of EU payments. The government has a range of options in front of it: the IFS itself suggests that in order to keep the status quo provision over the next five years, all income tax rates would need to be raised by 5% - or VAT would need to be raised to 24%.

And that issue has got Phillip Hammond and Jeremy Hunt in a bust up. The former wants to keep any potential tax rises to 2%, but Hunt is eyeing up a 3% rise. The problem for the Conservative Party is that both of these would break manifesto commitments, and still wouldn’t be enough to cover the additional expenditure.

The principal of hypothecated taxes (taxes that are ring fenced to fund one service, i.e. the NHS) is that they tie the government’s hands unnecessarily. Both the IFS and more radical critics oppose hypothecated taxes for this reason, though they are more popular with the public.

Showing 3 reactions

Please check your e-mail for a link to activate your account.