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IFS: Britain spending squeeze to be bigger than any advanced economy
Think tank says UK's fiscal consolidation over the next parliament will be largest out of 32 advanced economies, including austerity-hit Greece and Portugal
George Osborne has claimed that no "major tax rises" are needed to meet its target of achieving an overall surplus of £23bn by 2020, but the IFS says this is unlikely Photo: PA
By Szu Ping Chan
10:06AM GMT 04 Feb 2015
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Britain faces a spending squeeze larger than any advanced economy over the next five years, according to the Institute for Fiscal Studies, which warned that tax hikes were likely if the Government was to meet its target of balancing the books.
Under current plans, the UK's fiscal consolidation over the next parliament will be largest out of 32 advanced economies, including austerity-hit Greece and Portugal.
The think-tank's analysis also showed that spending plans set out by Labour would leave Britain's already massive debt pile 10 percentage points larger than under a Conservative government.
Paul Johnson, director of the IFS, recently warned that Labour's borrowing plans left little room for the government to offer emergency help in the event of another crisis.
George Osborne has claimed that no "major tax rises" are needed to meet its target of achieving an overall surplus of £23bn by 2020.
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The IFS said 98pc of the remaining fiscal consolidation was currently planned to come from spending cuts, which the government's official forecaster has said will take the size of the state to its lowest share of gross domestic product (GDP) in 80 years.
The Chancellor has already outlined £30bn of extra cuts that would be implemented by a Conservative government after the general election, including a £25bn reduction in the welfare bill and £5bn from targeting aggressive tax avoidance.
However, the IFS said tax hikes might be necessary to balance the books. "None of the parties is talking about significant tax rises, but history suggests that general elections tend to be followed by tax rises. The first year after each of the last five elections has seen the announcement of net tax rises of more than £5bn per year in today’s terms," the IFS said on Wednesday.
Mr Johnson said there "long way to go" before the public finances recovered from the damage caused by the financial crisis.
“Mr Osborne has perhaps not been quite such an austere Chancellor as either his own rhetoric or that of his critics might suggest. He has not cut spending in real terms as much as planned, as inflation has undershot," he said. "One result is that he or his successor will still have a lot of fiscal work to do over the course of the next parliament."
However, analysis by Oxford Economics showed that the government could afford to scrap large parts of its austerity plans if the economy continues to grow in line with official forecasts.
It said the amount of additional belt-tightening required to offset the damage caused by the financial crisis depended on the size of Britain's output gap – or room the economy had to grow before generating inflationary pressures.
The smaller the output gap, the more the austerity needed to plug the black hole in Britain's public finances.
Treasury forecasts show the Office for Budget Responsibility (OBR) believes the output gap was 1pc in 2014, while Oxford Economics believes it was closer to 4.1pc. In 2015, the OBR believes this gap will fall to 0.5pc, while Oxford Economics thinks the gap will be closer to 3.4pc.
It likened the recent fall in oil prices to "a large VAT cut" that it said would help the UK to grow at its fastest pace since 2006.
“For UK households the collapse in the price of oil is the equivalent of a large VAT cut, a pre-election giveaway financed largely by the oil producers. This will provide a significant boost to households’ spending power and should mean that 2015 sees zero inflation and 3pc GDP growth, a powerful combination," said Andrew Goodwin, senior economist at Oxford Economics.
"With very low inflation, even such strong growth is unlikely to force the Bank of England to raise interest rates before 2016 at the earliest."
"What’s more if, as we believe, there is plenty of spare capacity in the economy, the UK will be able to continue to enjoy strong growth through the medium-term."
Think tank says UK's fiscal consolidation over the next parliament will be largest out of 32 advanced economies, including austerity-hit Greece and Portugal
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George Osborne has claimed that no "major tax rises" are needed to meet its target of achieving an overall surplus of £23bn by 2020, but the IFS says this is unlikely Photo: PA By Szu Ping Chan
10:06AM GMT 04 Feb 2015
Follow
63 Comments Britain faces a spending squeeze larger than any advanced economy over the next five years, according to the Institute for Fiscal Studies, which warned that tax hikes were likely if the Government was to meet its target of balancing the books.
Under current plans, the UK's fiscal consolidation over the next parliament will be largest out of 32 advanced economies, including austerity-hit Greece and Portugal.
The think-tank's analysis also showed that spending plans set out by Labour would leave Britain's already massive debt pile 10 percentage points larger than under a Conservative government.
Paul Johnson, director of the IFS, recently warned that Labour's borrowing plans left little room for the government to offer emergency help in the event of another crisis.
George Osborne has claimed that no "major tax rises" are needed to meet its target of achieving an overall surplus of £23bn by 2020.
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The IFS said 98pc of the remaining fiscal consolidation was currently planned to come from spending cuts, which the government's official forecaster has said will take the size of the state to its lowest share of gross domestic product (GDP) in 80 years.
The Chancellor has already outlined £30bn of extra cuts that would be implemented by a Conservative government after the general election, including a £25bn reduction in the welfare bill and £5bn from targeting aggressive tax avoidance.
However, the IFS said tax hikes might be necessary to balance the books. "None of the parties is talking about significant tax rises, but history suggests that general elections tend to be followed by tax rises. The first year after each of the last five elections has seen the announcement of net tax rises of more than £5bn per year in today’s terms," the IFS said on Wednesday.
Mr Johnson said there "long way to go" before the public finances recovered from the damage caused by the financial crisis.
“Mr Osborne has perhaps not been quite such an austere Chancellor as either his own rhetoric or that of his critics might suggest. He has not cut spending in real terms as much as planned, as inflation has undershot," he said. "One result is that he or his successor will still have a lot of fiscal work to do over the course of the next parliament."
However, analysis by Oxford Economics showed that the government could afford to scrap large parts of its austerity plans if the economy continues to grow in line with official forecasts.
It said the amount of additional belt-tightening required to offset the damage caused by the financial crisis depended on the size of Britain's output gap – or room the economy had to grow before generating inflationary pressures.
The smaller the output gap, the more the austerity needed to plug the black hole in Britain's public finances.
Treasury forecasts show the Office for Budget Responsibility (OBR) believes the output gap was 1pc in 2014, while Oxford Economics believes it was closer to 4.1pc. In 2015, the OBR believes this gap will fall to 0.5pc, while Oxford Economics thinks the gap will be closer to 3.4pc.
It likened the recent fall in oil prices to "a large VAT cut" that it said would help the UK to grow at its fastest pace since 2006.
“For UK households the collapse in the price of oil is the equivalent of a large VAT cut, a pre-election giveaway financed largely by the oil producers. This will provide a significant boost to households’ spending power and should mean that 2015 sees zero inflation and 3pc GDP growth, a powerful combination," said Andrew Goodwin, senior economist at Oxford Economics.
"With very low inflation, even such strong growth is unlikely to force the Bank of England to raise interest rates before 2016 at the earliest."
"What’s more if, as we believe, there is plenty of spare capacity in the economy, the UK will be able to continue to enjoy strong growth through the medium-term."
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