Budget defers cuts until after election, says IFS

The Institute of Fiscal Studies (IFS) claims the situation has been made worse by a £3 billion unfunded net tax cut in the Budget.

The IFS also raised questions over whether health and schools spending in England could continue to be protected, with the resultant threat of major cuts to other departments’ budgets.

In a highly critical assessment, IFS director Paul Johnson said Mr Osborne’s decision to spend £5bn on capital projects, childcare and social care, coupled with the increase in income tax allowances and cuts to beer and fuel duties and corporation tax, “leaves even less for everything else”.

He said the tighter fiscal conditions expected after the 2015 election came against a “desperately disappointing” forecast on the deficit, with the Chancellor due to borrow £70bn more in 2014-15 than he had originally hoped.

Year-on-year spending cuts in Whitehall departments had “effectively come to an end” for the rest of this parliament, said the IFS.

But the think-tank identified an unfunded net tax cut of £3bn for 2015-16 in Mr Osborne’s plans, and pointed out Whitehall departments will have to absorb the impact of an increase in National Insurance payments due to changes in the pension system, estimated at £3.3bn.

This implies “a cut in real resources going to public services” after the election, unless the Chancellor took the alternative option of tax hikes, which now looked “more likely than not”, said Mr Johnson.

“The implication is that the real effect of public-spending cuts pencilled in for the next parliament will be even more severe than expected,” he said.

“Add to that the fact that we are promised more capital spending, more spending on social care and a more generous childcare subsidy, within an overall spending envelope that has not been expanded, and the outlook for all other unprotected spending looks grim indeed.”

Increases in the income tax personal allowance and cuts in corporation tax and fuel duties since 2010 would together cost the Exchequer a “pretty remarkable” £24bn a year by 2016-17 – nearly double the amount raised by hiking VAT to 20 per cent in 2011 – said Mr Johnson.

“That would be a big investment at any time. In the current fiscal climate, this is a striking investment in a narrow range of priority areas,” he said.

Mr Johnson was critical of the government’s decision to squeeze departmental spending in the first two months of this year and delay some major payments in order to ensure that borrowing for 2012-13 went down by the narrowest of margins compared with last year – from £121bn to £120.9bn.

“There is every indication that the numbers have been carefully managed with a close eye on the headline borrowing figures for this year,” he said.

“It is unlikely that this has led either to an economically optimal allocation of spending across years or to a good use of time by officials or ministers.”

The IFS also questioned claims by the government that it was hitting the richest hardest with austerity measures, with evidence that the wealthiest would be better off while the poorest worse off under the government’s measures.

In the Commons, shadow chancellor Ed Balls accused Mr Osborne of looking “out of touch and increasingly out of his depth”. He added: “It is a Groundhog Day Budget from a failing and out-of-touch Chancellor. Twelve months on and living standards are still falling.

“It is Groundhog Day 2 because, as a result of this stagnation, the Chancellor’s fiscal plans are even more wildly out of control than they were a year ago. No wonder his fiscal credibility is in tatters.”