£23bn black hole at heart of Budget
Families face £480 tax rises to pay for slower growth, warn experts
A BUDGET black hole of £23billion could lead to future tax rises of £480 for every family after the general election.
The Institute for Fiscal Studies warned the next government will have to find the money in the two years after the election if it is to get public finances back on track.
If ministers keep cutting spending at the current rate, £9billion of tax rises would be necessary in 2016/17 – the equivalent of an increase of 3p on the basic rate of income tax.
The savings will have to be made because of deterioration in the state of the public finances after growth predictions were slashed in half.
But this week’s Budget also slapped £3.5billion of extra costs on government departments who will have to pay higher National Insurance contributions as a result of reforms to pensions. That will raise the likely tax hit to £12.5billion.
The Treasury claims the Government would like to make austerity savings using spending cuts alone. But that would mean Whitehall departments enduring unprecedented cuts of 18 per cent by 2017/18.
And the Budget ‘Red Book’, which spells out all the Chancellor’s budget measures, actually reveals that officials are already considering tax rises. ‘It would, of course, be possible to do more of this further consolidation through tax instead,’ the document says. IFS director, Paul Johnson, said that suggests tax rises are on the cards after the next election, whoever wins in 2015. He said: ‘It seems extremely hard to imagine we will really achieve an additional £23 billion of spending cuts by 2017/18.
As the Red Book almost acknowledges, it seems likely there will be some significant tax increases to offset some of those cuts.’
The IFS called the state of the public finances ‘desperately disappointing’, with the Chancellor due to borrow £70billion more in 2014/15 than he had originally hoped.
Mr Johnson warned that the poor state of the public finances also means a ‘grim’ future for departments whose budgets will not be protected.
The Government has ringfenced spending in the NHS, international aid and schools. Mr Johnson said: ‘Add to that the fact that we are promised more capital spending, more spending on social care and a more generous childcare subsidy, within an overall spending envelope that has not been expanded, and the outlook for all other unprotected spending looks grim indeed.’
The warning came as the Institute for Public Policy Research, a centre left think tank, warned that belttightening is set to hit the Armed Forces hard.
The Coalition’s spending review, which will draw up budgets for 2015/16 over the next few months, looks set to demand cuts of £1.65billion from the Ministry of Defence.
Local government also faces a £ 1.5billion cut, with £ 930 being slashed from the Department of Business budget, £850million from the non- schools parts of the education budget, £500million from the Home Office and £460million slashed from the Ministry of Justice.
That will annoy senior members of the Cabinet – Home Secretary Theresa May, Business Secretary Vince Cable, Defence Secretary Philip Hammond and Local Government Secretary Eric Pickles – who have been dubbed the National Union of Ministers for protesting that they can’t make more cuts.
A defiant Mr Osborne said he would make no apology for cutting spending yesterday after he was accused of ‘massaging’ the figures on borrowing to score a political point.
The IFS said his manipulation of the borrowing figures could lead to ‘real economic costs’.
Labour also seized on revelations that £2.2billion was trimmed from the NHS budget at the last minute – money which could have been spent on frontline care or hiring nurses.
But Mr Osborne rejected the criticism, saying he was proud to have got spending under control.
‘We have been very, very tough and we have reduced spending in order to reduce borrowing,’ he said. ‘So if the charge is, you stepped in to stop government spending too much at the end of the financial year, that’s right.’
The problem arose in February when Mr Osborne was warned by the Office of Budget Responsibility that income tax receipts were £5.1billion lower than expected.
That triggered a period of frantic horse-trading in which the Treasury leaned on other departments to underspend their budgets. Figures, never published before, showed that £3billion was also found from the Defence budget and £900million from Transport.
Other money was saved by delaying payments to bodies like the World Bank and the European Union.
The exercise opened up Mr Osborne to the charge that he has fiddled the figures, using the kind of accounting tricks for which Gordon Brown was once notorious.
The IFS was damning about that exercise, effectively accusing ministers of wastefully manipulating spending plans for political ends.