IFS calls Osborne’s budget a ‘precarious balancing act’

Lead economists warn the chancellors inflexibility may lead to yet more cuts


Today the Institute for Fiscal Studies (IFS) has published its long-awaited Green Budget 2016, produced in association with the Institute of Chartered Accountants in England and Wales (ICAEW).

It finds that chancellor George Osborne has ‘boxed [himself’] in’ and will now be forced to perform a ‘precarious balancing act’ to deliver on unrealistic targets.

The report, which was funded by the Nuffield Foundation and includes analysis from Oxford Economics, states that the chancellor could be forced to make even more spending cuts or increase taxes, due to the ‘very inflexible’ target he set himself to balance the budget by 2019-20.

Osborne’s fiscal mandate requires the government to run a surplus every year from 2019-20 ‘in normal times’ (ie. not in times of recession). But the IFS stresses that ‘like most big economies the UK has only rarely run a surplus – just eight times in the last 60 years.’

“Osborne’s target is ‘radically different from the UK’s previous fiscal rules’, and as such the chancellor may find it hard to deliver on his promises without making yet more cuts.

“The rule has the merit of simplicity and transparency but is very inflexible and this could come at a cost. It could require big tax rises or spending cuts with very little notice in order to ensure it is met.

“Even if the chancellor gets to the March 2019 Budget with his plans intact, past errors in official forecasts suggest that there would be more than a one-in-four chance that he would need to implement in-year tax rises or spending cuts to deliver a budget surplus in 2019–20.”

The IFS says that Osborne’s inflexibility is likely to come back to haunt him, and that the biggest question now facing the chancellor is how he will respond if forecasts change and he needs greater tax rises or spending cuts to make the books balance.

Osborne’s plans, set out in the November Spending Review, are reliant on tax revenues rising. But as the IFS points out, tax revenues are volatile and uncertain; last week’s Bank of England inflation report downgraded forecast average earnings by more than 1 per cent just since November.

If average earnings do rise 1 per cent less by 2019–20 than the November forecast, according to the IFS research Osborne could expect to lose £5 billion of income tax and National Insurance revenues.

Other areas of concern set out by the Green Budget are:

•  Osborne’s promised £8 billion per year of income tax cuts in the form of a higher personal allowance and an increased higher-rate threshold, which are currently unfunded and would require equivalent tax rises or spending cuts elsewhere

•  The forecasts depend on Osborne raising fuel duties in line with the RPI, something he has failed to do since 2011. Freezing them for a further five years would cost £3 billion.

• The fiscal mandate rules out borrowing to invest even where low interest rates mean such investment would be economically beneficial and would not otherwise occur.

Ross Campbell, ICAEW director of public sector and co-author of two chapters in the Green Budget, said of the findings:

“The government was elected on the promise to reduce borrowing. But currently it does not have a comprehensive view of the UK’s financial accounts.

“Getting the best outcomes for the public finances in challenging times, means being supported by modern financial management as well as having the full economic picture. Without these, the consequences of policies decided cannot be seen in their full context.”

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