Think-tank warns Philip Hammond is '˜between a rock and a hard place' on Budget

A warning that it is 'increasingly questionable' whether the Chancellor can balance the books by the mid-2020s comes today from an influential think-tank.

Chancellor Philip Hammond is struggling to balance the books. Picture: Matt Dunham/PA

The EY Item Club argues that Philip Hammond is “between a rock and a hard place” in his Budget later this month. It says he is being pressed for “bold action” amid squeezed public sector pay and economic headwinds, but is having to contend with anticipated higher Budget deficits medium term.

In his 2016 autumn statement, the Chancellor rowed back on the previous Tory government’s pledge to achieve a balanced Budget by 2020 – substituting a target of the middle of the next decade.

However, the EY Item Club doubts he can meet the new target, warning his room for manoeuvre is “severely constrained” by the independent Office for Budget Responsibility (OBR) cutting its productivity forecasts.

Howard Archer (above), chief economic advisor to the EY Item Club, said: “The major fly in the ointment for the Chancellor this Budget is that the OBR has already announced it will significantly downgrade its assumptions for UK productivity growth over the next five years in its forecasts.”

Archer said the OBR will “probably” reduce its GDP growth forecasts for the UK and lift its Budget deficit projections. In March, the OBR indicated that Hammond had a buffer of £26 billion if he was to bring the structural budget deficit below a targeted 2 per cent of GDP in 2020/21. “This looks likely to be substantially reduced. It also looks increasingly questionable as to whether the Chancellor can achieve a balanced budget by the mid-2020s,” Archer said.

Mark Gregory, EY’s chief economist, said the squeeze on available resources for the Chancellor to give away any Budget goodies “couldn’t have come at a worse time”.