This came after Osborne admitted in Wednesday’s Autumn Statement that austerity would be extended for a further year to 2018.
The IFS calculates that, on the chancellor’s current plans, achieving these additional cuts over three years would see almost a third slashed from some departmental budgets by the end of the austerity period. This would hit unprotected sectors including defence, the home office, local government and business.
This consolidation scheme would see 85 per cent of the cumulative deficit reduction originate from spending cuts by that time, and 15 per cent from tax hikes.
Were Osborne to choose an 80-20 split, as he previously said he would, he would end up cutting less but having to hike taxes by some £7bn over the three years, the think-tank noted. It remains unclear what the chancellor would like to do.
IFS director Paul Johnson said the most straightforward means of raising cash would be to add 1p to the basic rate of income tax or boosting VAT on currently zero-rated items – but these would be politically unpopular and threaten electoral disaster.
A £7bn tax hike would mean the Treasury would only have to find current expenditure savings from eligible departmental budgets worth around 12 per cent between 2015 and 2018 – rather than the 16.2 per cent cuts it currently has pencilled in. Schools, aid and the NHS are still ringfenced, though pressure may mount for these to become eligible for cuts. Another option would be to cut into benefits budgets. Johnson told City A.M. that the Treasury could pull in around £2bn to £3bn through means testing winter fuel allowance and other age-related benefits. But other options, such as cutting housing benefit or child tax credits, would be hard to sell politically.
More detailed plans will be released next year, in the government’s Spending Review 2013.
Osborne’s pain could be compounded if the UK loses its vaunted AAA credit rating – a development that panellists at an Institute of Economic Affairs and TaxPayers’ Alliance (TPA) discussion yesterday thought likely, after a warning from Fitch. But TPA boss Matt Sinclair, who was on the panel, said that during the euro crisis ratings agencies have reacted after markets have already moved – and thought that agencies’ concerns would be built into yields already.
And Osborne played down these worries, telling the BBC a rating was just “one of a number of ways in which people look at countries,” in stark contrast to his 2010 claim that ratings were a vital measure of economic success.