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IFS says Osborne faces tough choices to hit deficit target

George Osborne could be forced to raise taxes or increase his public spending cuts if he wants to hit his target of turning Britain’s budget deficit into a surplus by the end of the parliament, the Institute for Fiscal Studies has said.

The UK’s leading thinktank on public finances said a weaker-than-expected growth performance or over-optimistic forecasts for tax receipts might mean the chancellor has to make unpopular decisions.

Osborne has pledged to turn the deficit, which the independent Office for Budget Responsibility puts at almost £70bn in the current 2015-16 financial year, into a surplus by 2019-20.

In its annual “green budget”, which analyses the state of the public finances before Osborne’s March budget, the IFS said British governments had run a surplus in only eight of the past 60 years.

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 said Osborne was planning to run a budget surplus of £10bn by 2019-20, but he faced a number of challenges on the tax side.

The chancellor was banking on tax revenues rising, largely in response to big tax increases announced since the general election. “But tax revenues are volatile and uncertain. Last week’s Bank of England inflation report downgraded forecast average earnings by more than 1% just since November. If average earnings do rise 1% less by 2019–20 than the November forecast, he could expect to lose £5bn of income tax and National Insurance revenues. The fall in equity prices seen just since the spending review could, unless it proves purely temporary, cost the government £2bn in lower capital tax receipts in 2020.”

The IFS said Osborne had also promised £8bn in income tax cuts but had yet to say where the money was coming from to pay for a higher personal allowance and an increased higher-rate threshold. “Other things equal, delivering them will require equivalent tax rises or spending cuts elsewhere,” it said.

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Treasury forecasts also depend on the chancellor raising fuel duties in line with inflation as measured by the retail prices index – something the chancellor has failed to do since 2011. Freezing them for a further five years would cost £3bn, the IFS noted.

Andrew Goodwin, the lead UK economist at Oxford Economics, which puts together the economic forecasts for the green budget, said: “The renewed fall in the oil price promises to keep inflation lower for longer and should prolong the ‘sugar rush’ enjoyed by UK consumers over the past year. This is a very welcome development given the substantial headwinds to global growth.

“But once this ‘sugar rush’ has faded, GDP growth is likely to slow as the welfare cuts and cuts to government departmental spending exert a significant drag. This will mean that the pace of growth remains underwhelming and that the economy still has some spare capacity left at the end of the parliament.”


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