Mar 21 2013
The Budget has set the scene for "severe" public spending cuts and possible tax rises in the years following the next general election, a respected economic think-tank has warned.
And with health, schools and aid due to be shielded from cuts at least until 2016, the prospects for unprotected areas like law and order, defence, justice and transport look "grim", said the Institute for Fiscal Studies.
Chancellor George Osborne's decision to spend £5 billion 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", warned IFS director Paul Johnson.
And the tighter fiscal conditions expected after the 2015 election come against a "desperately disappointing" forecast on the deficit, with the Chancellor due to borrow £70 billion more in 2014/15 than he had originally hoped.
Year-on-year cuts in Whitehall departments' spending have "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 £3 billion for 2015/16 in Mr Osborne's plans, and pointed out that Whitehall departments will have to absorb the impact of an increase in National Insurance payments due to changes in the pension system, estimated at £3.3 billion.
This implies "a cut in real resources going to public services" after the election, unless the Chancellor takes the alternative option of tax hikes, which now looks "more likely than not", said Mr Johnson.
And he added: "The implication is that the real effect of public spending cuts pencilled in for the next parliament will be even more severe than expected hitherto. 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 will together cost the Exchequer a "pretty remarkable" £24 billion a year by 2016/17 - nearly double the amount raised by hiking VAT to 20% 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 than borrowing for 2012/13 went down by the narrowest of margins compared to last year - down from £121 billion to £120.9 billion - saying: "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."