It's all pain and no gain until 2032, say experts

Published on Thursday 23 April 2009 22:08

THE UK's finances may not return to good health until 2032 because of the "breathtaking" damage caused by the credit crunch, it was claimed yesterday.

The Institute for Fiscal Studies (IFS), giving the first independent and authoritative analysis of this week's Budget, warned of "two parliaments of pain" as taxes rose and public services were slashed up to 2018.

It said every government department would have budget cuts of 2.3 per cent a year on average for three years – the toughest conditions since the early 1970s. The only exception would be the Department for International Development, which provides UK aid to the Third World.

The IFS calculated that the changes introduced by Alistair Darling this week, and in his Pre-Budget Report (PBR) in November, would generate around 90 billion a year to trim the national debt. By 2017-18, this would be the equivalent of sending every family in Britain an annual bill for 2,840.

But the biggest shock was the IFS's prediction that it will not be until 27 February, 2032 – dubbed "Darling debt freedom day" – that the level of national debt would return to 40 per cent of national income. This was one of the precious fiscal rules Gordon Brown introduced as chancellor, and which Mr Darling was forced to abandon last year as he increased spending in an attempt to halt the recession.

In his Budget speech on Wednesday, the Chancellor announced borrowing of 703 billion over the next five years – the highest since the Second World War – which will take the percentage of debt to GDP above 76 per cent by 2013-14.

The IFS, a respected think-tank, warned that the 50p income tax rate introduced for people earning more than 150,000 a year may not raise any extra revenue. Despite Treasury hopes it would generate 3 billion in its first two years – it is due to be implemented next April – the IFS said the 50p rate might actually result in a lower VAT yield as high-earners spent less. There was also the likelihood that a number of high earners were likely to dodge the tax or leave the country.

The IFS discovered that the Budget book contained no information on how the Treasury would generate 90 billion of cuts and tax rises from 2014 – prompting the Conservatives to claim the figures contained a giant "black hole".

IFS director Robert Chote said: "The Treasury's assessment of the fiscal damage wrought by the current economic and financial crisis is breathtaking."

He added it would require "two full parliaments of mounting austerity" to start to repair the public finances. But he warned the scale of the recession was such that it had caused permanent damage to the UK economy, equivalent to around 90 billion a year in lost tax revenues and higher social security costs.

And with new taxes only due to cover 10 per cent of the extra revenue sought by the Treasury by 2017-18, Mr Chote warned the main burden was likely to fall on people who used public services, such as health, education and transport. He added: "The Chancellor has laid out a broad-brush plan to deal with the problem, but with most of the detail – notably where the cuts will fall within public services – yet to be filled in." Shadow chancellor George Osborne said the IFS research proved that Mr Darling had failed to explain how half of the 2,840 per family cost of restoring the public finances would be carried out after 2014.

The IFS said that, under the Chancellor's plans, an average family would pay an extra 300 a year in tax and lose the equivalent of 690 a year in current government spending and 420 a year in investment spending – leaving an unfunded gap of 1,430.

Mr Osborne said: "This secret tax bombshell of 1,430 was not even announced by the Chancellor on Wednesday. It shows what a dishonest Budget it was."

Last night, Downing Street said it was puzzled by the IFS's calculations as they appeared to convert government savings into a "cost" for families.

The Prime Minister's spokesman said: "It's quite difficult at this time to give a considered response. It's not clear to us why you would count an efficiency saving as a cost to a family."

POLL BOOST

THE Conservatives' poll lead has stretched to 18 points in the wake of the Budget, it was revealed last night. The poll put Conservative support at 45 per cent – up four points – while Labour was down by the same amount on 27 per cent. The Lib Dems were backed by 18 per cent.

Meanwhile, a YouGov poll commissioned by the SNP on voting intentions for Holyrood constituencies put the SNP at 37 per cent and Labour at 30 per cent.