Taxes must rise, experts warn
The finances underpinning George Osborne’s spending review moved closer to unravelling today after two well-respected economic thinktanks warned it is not on track to balance the budget.
The Institute for Fiscal Studies (IFS) and the National Institute for Economic and Social Research (Niesr) both suggested taxes may have to rise to finance the government’s spending plans for the next four years.
Mr Osborne aims to wipe out the budget deficit by 2015/16. This is unlikely to be met without further tax increases, Niesr warned.
It suggested the chancellor faced an £18 billion shortfall, worth one per cent of national GDP, partly because Britain’s overpriced property market meant housing market projections were making the Treasury too optimistic.
The Office of Budget Responsibility’s predictions about the economic recovery were too optimistic, it suggested, also contributing to the shortfall.
The IFS warned significant risks remained to the chancellor’s plans to restore the public finances to a credible footing.
It said the structural budget deficit could turn out to be larger than anticipated, meaning further tax rises or deeper spending cuts might be necessary.
The quantity and quality of some public services will also be hit, it noted.
“Should this deterioration prove too great for the government’s liking then the chancellor might wish to top up his spending plans,” the IFS explained.
“A review of these spending plans in two years’ time would be a sensible move.”
According to the IFS the chancellor’s cuts are the worst since 1976, not since the Second World War as would have been the case under implied plans.
“The government’s plan is that these cuts to spending will help reduce structural government borrowing – the part that cannot be explained by temporary weakness in the economy – to below the level of investment spending within this parliament,” it added.
“But a key lesson from the last Labour government and the last Conservative government is that the public finances often do not behave as expected.”
The spending review attracted praise from the Organisation for Economic Cooperation and Development, however.
Secretary general Angel Gurria called the moves “a necessary step towards achieving long-term fiscal sustainability”.
“The measures are tough, necessary and courageous,” he commented.
“Acting decisively now is the best way to secure better public finances and bolster future growth .”
The OECD said the spending review’s prioritisation of education and research spending, together with mitigating cuts in infrastructure investment, had helped minimise effects on growth.
It called for further steps to focus on increasing the efficiency of health provision and education, but said the steps taken corresponded to the OECD’s call in May for a “concrete and far-reaching consolidation plan”.
