Public spending and taxes at risk, IFS cautions

The Institute for Fiscal Studies (IFS) has warned that Chancellor George Osborne could be forced to raise taxes or increase cuts to public spending in order to achieve his set targets.

The think tank for public finances said that weak growth performance and over-optimistic forecasts of tax receipts are likely to mean the Chancellor has to make unpopular decisions, such as budget cuts and raised taxes.

Osborne pledged to turn the UK’s deficit, currently estimated at £70 billion, into a surplus by 2019-20.

Paul Johnson, the IFS director, said: “Osborne’s new fiscal charter is much more constraining than his previous fiscal rules. Uncertainty in the fiscal forecasts means that he may well have to cut spending further or raise taxes to get to surplus in 2019–20.

“With public spending reaching historically low levels relative to national income, promises on tax cuts to keep and pay for, and pressure on revenues from a number of taxes, there may be more tough decisions to come. How he responds to any further unpleasant fiscal surprises may, more than anything we have seen so far, come to define his period as chancellor.”

The IFS claimed Osborne was planning to run a budget surplus of £10 billion by 2019-20, but faced a number of challenges regarding the operation of taxes.

It explained: “Tax revenues are volatile and uncertain. Last week’s Bank of England inflation report downgraded forecast average earnings by more than one per cent since November. If average earnings do rise one per cent less by 2019–20 than the November forecast, he could expect to lose £5 billion of income tax and National Insurance revenues. The fall in equity prices seen since the spending review could, unless it proves purely temporary, cost the government £2 billion in lower capital tax receipts in 2020.”