Soaring inflation will worsen cuts, says IFS

Julian Harris
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HIGH inflation will deepen spending cuts that the government is banking on to reduce the UK’s deficit, the Institute for Fiscal Studies (IFS) said yesterday.

While departmental spending, in real terms, allowing for inflation, was due to be cut by an average of 11.2 per cent over four years according to October’s figures, cuts are now estimated at 11.7 per cent.

Consumer price inflation has shot up to 4.4 per cent in recent months, with the Bank of England concerned it could soon exceed five per cent.

In November the Office for Budget Responsibility (OBR) predicted inflation of 2.8 per cent for this year, yet was forced to revise the forecast up to 4.2 per cent on Wednesday.

The government’s spending plans are “uncomfortably dependent” on the OBR’s wider forecasts and judgements on the economy, the IFS director Paul Johnson said, referring to its GDP forecasts and estimates of the economy’s output gap.

In a statement released to coincide with chancellor George Osborne’s Budget, the OBR admitted that danger to the deficit reduction plan.

“The biggest threat is the possibility that we have over-estimated the amount of spare capacity in the economy, now or in the future,” it said.

“If the output gap was roughly 1.5 per cent of potential output smaller than our central estimate then the government would no longer be on course to balance the cyclically-adjusted current budget in five years’ time.”