Osborne 'faces big cuts challenge'

This Is Lancashire: Further tough choices remain for George Osborne, according to a thinktank. Further tough choices remain for George Osborne, according to a thinktank.

An NHS funding crisis and Britain's burgeoning population could make George Osborne's austerity plans even tougher after the election, an influential think-tank has warned.

The Institute for Fiscal Studies (IFS) said the Chancellor faced a "huge challenge" to meet his goal of returning the nation's finances to surplus by 2018-19.

Just 40% of the planned cuts will have been delivered by the end of this year - with the remaining 60% needing to be pushed through amid massive pressures on key services.

In an indication of the uncertainty surrounding the economy, the report also suggested the coalition could have made the situation worse with the speed and depth of austerity.

The fiscal tightening over this Parliament is believed to have trimmed 4% off growth - 1% per year.

Andrew Goodwin of Oxford Economics, which worked with the IFS on the report, said the curbs had probably been more damaging than ministers had expected.

He also argued that the planned cuts could be largely unnecessary - because the Office for Budget Responsibility (OBR) has over-estimated the permanent damage caused by the 2008 crash.

The IFS's keenly-watched Green Budget found that, even with another £12 billion trimmed off welfare, the protection granted to areas like health and international development implied overall cuts for other departments of 30% since the coalition came to power in 2010.

The Government is facing additional fiscal pressures from expected population growth of 3.5 million between 2010 and 2018 and a two million increase in the numbers of over-65s, who make greater demands on the NHS.

The expected ageing of Britain's population means that even if health spending rises in line with inflation, real age-adjusted spending per person will be 9% lower in 2018 than in 2010, said the IFS. And a larger population means that cuts in public spending of 1.7% a year translate into a 2.4% reduction per person.

Meanwhile, additional spending commitments made by the Government after 2015 have already reached £6 billion, piling up pressure for more cuts elsewhere.

The IFS also sounded a warning about the Treasury's increasing reliance on a small group of 300,000 super-rich taxpayers in the top 1% of earners, whose share of total income tax has risen from 11% in 1979 to 27.5% now.

Even if Mr Osborne succeeds in achieving a budget surplus by 2018, national debt will have swollen to 76% of national income by that date and would return to pre-crisis levels only in the mid 2030s, warned the IFS. With debt at that level, just paying the interest will take up nearly 4% of national income.

IFS director Paul Johnson said: "Returning growth, and forecasts suggesting we should be running a Budget surplus by 2018/19, should not lull us into a false sense that all is now well with the public finances.

"The outstanding debt will still be very large and the scale of additional spending cuts required to hit that budget surplus remains hugely challenging, especially on top of cuts already delivered. A combination of significant additional spending pledges already made and a growing and ageing population will only add to the challenge."

Sounding a more positive note, Mr Goodwin said: "The UK recovery is getting ever closer to achieving 'escape velocity', although the unbalanced nature of the recovery to date emphasises the need to avoid complacency.

"Nevertheless, we believe that an improving global outlook will provide the basis for the recovery to broaden out this year, by supporting export growth and giving firms the confidence to invest their large cash piles."

Mr Goodwin said his forecasts emphasised the problems with the Government's policy of targeting a cyclically-adjusted measure of the deficit.

The body has estimated that the economy has an 'output gap' - the amount of spare capacity ready to be used - of 5%, compared to the OBR's figure of 2.3%. If they are right, tightening after the next election may only need to be equivalent to 1% of GDP to balance the books.

"Oxford Economics analysis suggests that the economy has a significantly larger amount of spare capacity than the OBR estimates which, in turn, suggests that the medicine of austerity could end up being applied in a dose higher than the patient actually needs," Mr Goodwin said.

"We certainly think they are being asked to tighten too much. We think the repair job is not as large as they think it is."

The IFS poured cold water on Liberal Democrat Deputy Prime Minister Nick Clegg's call for further rises to £12,500 in the level at which workers start paying income tax.

Further significant increases in personal allowance would be "expensive and poorly targeted at helping the low paid", as one in six workers now pay no income tax and would therefore not benefit. Only 15% of any further rises in the threshold level would go to workers in the bottom half of the earnings ladder, said the IFS.

But the thinktank was even less complimentary about Labour's proposal to restore the 10p starting rate of income tax, saying that it was "hard to find a coherent economic rationale" for the change, which would be "if anything, less well targeted on the low paid and would add unnecessary complexity".

The IFS also found "no evidence" of a housing bubble as a result of the Government's controversial Help to Buy policy. Nationally, prices remain 25% below their peak when adjusted for inflation while in London the figure is 17% - although there is "cause for concern" that the price-to-earnings ratio is above trend in the capital.

The IFS warned that current support for childcare was "not well designed" and that - despite proposals from all sides for more spending - there was little evidence that it was effective in allowing mothers to enter the labour market.

IFS deputy director Carl Emmerson said: "Despite the state of the public finances, tax cuts and spending increases are being considered by Government and opposition. They seem agreed in promising additional spending on childcare despite a remarkable lack of evidence as to its effectiveness.

"They seem equally set on further cuts in income tax, either through more increases in the personal allowance or the introduction of a 10p starting rate. Either could be expensive and would be poorly targeted on the low paid."

A Liberal Democrat spokesman said: "The Liberal Democrats are nothing other than incredibly proud of the tax cuts we have delivered in Government for ordinary people.

"In April, over 20 million people will have had £700 put back in their pockets by a policy that was on the front page of the Lib Dem manifesto and that we have made happen in Government.

"This policy is about making work pay. The British people have made great sacrifices as we repair the economy after the mess Labour left it in. That is why the Lib Dems are pushing for a further worker's bonus of a £100 tax cut at the next Budget.

"People earning £12,500 or a little bit more, who will benefit most from this tax cut, don't regard themselves as rich and neither do we.

"It is hard to cut taxes further for the 2.7 million people who will have been lifted out of paying income tax altogether in April because of this flagship Lib Dem policy."

A Treasury spokesman said: "As the IFS say in their report today, the UK economy has gathered momentum and growth is now among the fastest in the developed world.

"But, as they also say, 'the largest challenge for the Chancellor remains having to contend with the consequences of the Great Recession for the public finances and household incomes'.

"That is why it's so important that we continue to work through the long-term plan that is delivering economic security for Britain's hard-working people."

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