IFS Warns Osborne Will Have To Borrow More

Ed Conway, Economics Editor
IFS Warns Osborne Will Have To Borrow More

George Osborne has been dealt an embarrassing blow as the Institute for Fiscal Studies predicted that he will be forced to borrow more this year than last - only months after the Chancellor insisted he would not.

In its Green Budget, a deep assessment of the public finances, the IFS predicted that there was a "greater than 50:50 chance that borrowing will be higher this year in cash terms than last year".

At the Autumn Statement last year, the Office for Budget Responsibility predicted that the deficit this year would drop from £121.4bn to £120.3bn - something which was seen as a major political coup for the Chancellor over Shadow Chancellor Ed Balls.

In a further sign of the scale of austerity baked into Mr Osborne's plans, the IFS also said that under his current spending scheme, "unprotected" Whitehall departments - namely all but the NHS, schools and International aid - would have their budgets cut by a third between 2010/11 and 2017/18.

It also predicted that some 1.2 million public sector jobs would be cut - 300,000 more than the official OBR forecast.

It said that departments were tending to cut staff rather than wages, which helps explain the disparity. It said that cutting pay growth per head from 3% to 2% would save 140,000 general government jobs between now and 2018.

However, the IFS said that, contrary to some reports, Mr Osborne had actually increased borrowing and hence imposed less of an overall squeeze than he had originally planned for in 2010.

It said that by the end of this Parliament in 2014/15 the Chancellor will have borrowed £64bn more than he had planned only two years ago.

Instead, the majority of the spending cuts will be imposed in future years, without being offset by more borrowing.

IFS director Paul Johnson said: "As economic performance and forecasts have worsened the Chancellor has followed a dual strategy. He is allowing borrowing to increase substantially in this parliament - allowing the automatic stabilisers to work - whilst promising another dramatic dose of public spending cuts in the next parliament."

"The effects of concentrating all those cuts on currently unprotected areas of public service spending look hard to contemplate.

"A more likely scenario perhaps is that other choices will be made after the next election.

"Taxes could rise, hitherto protected elements of public spending, like the NHS and pensions, could be hit, or the date at which we reach fiscal balance will be pushed further out.

"If taxes are to rise, or social security spending is to be cut, then a much clearer strategy should be set out. There are important ways in which the tax system could be made more efficient and be reformed to bear more heavily on "the rich", but there are also damaging options. And we do need to recognise that we are already very dependent on a small group for a lot of tax revenue.

"There are legitimate concerns about corporate tax avoidance. But over long periods revenues have held up well, and within the current structure defining and tackling avoidance effectively is difficult."

A Treasury spokesman said: "As the Institute for Fiscal Studies shows, the Government continues to tackle the deficit in a way that ensures those with the broadest shoulders bear the heaviest burden.

The IFS point out tax and benefit changes since the beginning of the Parliament will "hit the richest households hardest", and changes this April will benefit working households.