Cuts will have to be colossal, warn the experts

GEORGE Osborne will have to impose spending cuts ‘on a colossal scale’ to meet his targets, a leading think-tank warned yesterday.

The independent Institute for Fiscal Studies said the Chancellor would have to slash welfare or put up taxes by £21billion just to keep cuts down to the same level as Britain has seen in the past five years.

Without this, £55billion in cuts will be needed after next May’s election if the Tories win, compared with the £35billion made since the Coalition came to power in 2010.

The respected think-tank suggested cuts on this scale would mean a ‘fundamental re-imagining of the role of the state’. It urged Mr Osborne to spell out before the election what the cuts would mean for public services such as transport, policing and defence.

IFS director Paul Johnson said: ‘It is surely incumbent upon anyone set on taking the size of the state to its smallest in many generations to tell us what that means. How will these cuts be implemented?

‘What will local government, the defence force, the transport system look like in this world?

‘One thing is for sure. If we move in anything like this direction, whilst continuing to protect health and pensions, the role and shape of the state will have changed beyond all recognition.’

Figures released yesterday also suggest that Labour’s plan to cut the deficit more slowly if it wins the

‘Course to prosperity’

election would leave Ed Balls free to borrow about £25billion more than the Conservatives to fund a spending splurge – adding to Britain’s mountain of debt. Mr Osborne has already announced plans for a further £12billion of cuts in welfare after the election. But the IFS said this would have to almost double to £21billion to maintain the current pace of cuts to other areas of spending. The scale of the challenge is made harder by the Government’s decision to protect – or ring-fence – spending on health, schools and foreign aid, meaning that cuts in other areas of public spending will have to be far deeper. Budgets for unprotected departments such as defence, transport and the Home Office are on course to fall by an average of almost a third unless the Government cuts welfare more deeply or raises taxes. By 2020 spending on health and the state pension will account for almost a third of all Government spending – 32 per cent, up from 14 per cent when the welfare state was founded after the Second World War.

The IFS said that despite a slew of announcements on new roads and flood defences there was ‘no spending dividend on the horizon’. Mr Johnson said: ‘On these plans, whichever way you look at it, we are considerably less than halfway through the cuts.’

The figures also underline the difficulty the Conservatives will face in finding the £7billion needed to pay for big increases in the personal tax allowance and the 40p income tax threshold after the election.

Mr Osborne defended his proposals, insisting voters faced a choice between the ‘course to prosperity’ set out in the Autumn Statement or a return to the chaos seen under Labour. ‘I’ve got a plan to reduce the deficit. I’m not going faster than that plan, I’m not going slower than that plan,’ he said. ‘We have demonstrated in specific ways over the past four years that we can reduce the cost of public services while actually improving the quality.’

He has already set out plans for £11.5billion of additional cuts for 2015/6. The Tories have said a fur- ther £25billion will be needed in the following two years to clear the budget deficit. However, the IFS says the true level of cuts needed for that period is nearer £30billion.

It said recent progress on reducing the deficit had been ‘disappointing’, with the gap between spending and income falling by only £6billion in the past year to £91.3billion. The think-tank also raised concerns about the sharp fall in tax revenues. Mr Johnson said that, despite the recovery, the Office for Budget Responsibility

‘Continued cause for concern’

had produced a ‘really substantial downgrade’ of £8billion in expected tax revenues this year.

The shortfall is set to rise to £21billion by 2017/18, making it even more difficult for Mr Osborne to pay down the national debt. He said on Wednesday he wants a budget surplus of £23billion by 2019/20, which it is estimated would require a further £14billion of cuts.

‘This lack of buoyancy in tax revenues, associated with poor earnings growth, looks like being a continued cause for concern,’ said Mr Johnson.