The government must choose this autumn between more austerity and permanently higher spending, experts warn.
Although the Autumn Budget has been cancelled, the Treasury is still set to publish a Spending Review containing government expenditure plans.
Because of Covid-19, public spending is likely to rise to the highest share of national income in more than a decade, says the Institute for Fiscal Studies.
If not, another bout of austerity will hit many public services, it warns.
A Treasury spokesperson said: “The Spending Review will proceed this autumn, as planned. The chancellor has already confirmed that departmental spending will increase above inflation - both for day-to-day spending and longer-term investment.”
The IFS forecasts come in a newly published advance chapter of its Green Budget 2020, which will be released in full next month.
“Plans will depend crucially on how much of the additional £70bn of public service spending - that’s an increase of 20% on original plans - allocated this year to deal with the Covid-19 pandemic will need to be repeated in future years,” the IFS said.
“Even if only a quarter of it is needed, for example to maintain purchases of personal protective equipment (PPE) and to keep a track-and-trace system going, then overall spending would have to rise well ahead of the plans set out in the last Budget, or another bout of austerity will be visited upon many public services.”
The think tank said there would be other financial pressures, including on working-age social security spending and adult social care, while the economy was likely to be smaller than expected for a long period.
“The next set of spending decisions is likely therefore to result in public spending settling at a higher share of national income than it was after 10 years of Labour government back in 2007-08,” it added.
The IFS said the UK had been through the longest sustained squeeze in public spending on record, but despite this, on the eve of the pandemic, public spending was at 39.8% of national income, much the same as it was in 2007−08.
Measures in Mr Sunak’s Budget announced in March would have increased public spending by 10.7% over the next four years, but those plans had already been rendered obsolete by the coronavirus crisis, the think tank said.
Ben Zaranko, a research economist at IFS and the author of the research, said the pandemic and the looming end of the Brexit transition period made it an “extraordinarily difficult time” for the chancellor to be formulating public spending plans.
Some programmes brought in to fight the pandemic could “swallow up huge amounts of money” and leave some public services facing another round of budget cuts.
“Avoiding that scenario would require the chancellor to find billions of extra funding, paid for at some point through higher taxes,” he added.
Governments normally set spending priorities for several years ahead, but given “the huge amount of economic uncertainty”, the IFS said Chancellor Rishi Sunak would be “ill-advised” to embark on a multi-year Spending Review.
“Instead, it would be sensible to limit this year’s Spending Review to a single year (2021−22), and delay decisions on spending in future years until a point when some of the uncertainty over Covid-19, Brexit and the future of the economy has dissipated,” it added.