Budget growth downgrade prompts warning over wages and living standards
The downgrading of George Osborne's Budget economic forecasts has left households across Britain facing the prospect of falling wages and a squeeze on living standards, a leading economic think tank has warned.
The Institute for Fiscal Studies (IFS) said the deteriorating economic outlook meant the Chancellor had been forced to "pencil in" another year of austerity, with spending in the first year of the next parliament cut by £10 billion compared to previous plans.
In the Commons on Wednesday, Mr Osborne was forced to admit he would need tens of billions more in borrowing after the Office for Budget Responsibility (OBR) said growth would be lower than expected.
However at the IFS's post-Budget briefing, director Paul Johnson said that the effects of the downgrade would extend beyond the public finances.
"That loss largely arises from changes in assumptions about future productivity growth leading in to lower economic growth over the rest of parliament," he said.
"If the OBR is right about that, we should all be worried. This will lead to lower wages and living standards, not just lower tax revenues for the Treasury."
Mr Johnson said the Chancellor was paying the price for having made too much of the £27 billion which the OBR had "found down the back of the sofa" at the time of the Autumn Statement in November, when upward revision forecasts meant he was able to cancel planned cuts to tax credits.
The latest changes amounted to a £56 billion "loss" to the Exchequer - leaving him with a net loss of £29 billion.
Mr Johnson warned the Chancellor was now "running out of wriggle room" if he was to meet his self-imposed target of delivering a budget surplus by the time of the next general election in 2020.
He said that the risks were exacerbated by the fact that despite the worsening situation Mr Osborne had still given away £8 billion in tax cuts in the Budget.
"His chances of him having a surplus in 2019-20 are only just the right side of 50-50," he said.
"If there was another downgrade in fiscal forecasts of a similar magnitude and the Chancellor did wish to remain on course to deliver a budget surplus in 2019-20, then this would surely require more real policy change - presumably incorporating at least some permanent tax rises and specific spending cuts."
Mr Johnson said that the gainers from the Budget were at the upper end of the income scale while those at the bottom were largely unaffected.
IFS senior economist Stuart Adam said that even the rise in personal allowances for basic rate taxpayers to £11,500 largely benefited the better off as 43% of adults did not have incomes high enough to attract any income tax at all.
"This is very much a giveaway to the better-off parts of society," he said.
Mr Osborne played down suggestions that he will be forced to find more spending cuts or put up taxes in order to balance the books by the time of the election.
He made clear however that the commitment depended on the economy continuing to grow by at least 1% a year and that he would have to "alter" his plans if it fell back into another recession.
"We have got to hold to the course that we have set out," he told BBC One's Breakfast programme.
"A completely independent body which everybody respects - the Office for Budget Responsibility - has looked at those plans and it says 'If you hold to the course, you deliver those plans, if the economy grows as expected, then we will have a surplus towards the end of the parliament'.
"We wouldn't need anything extra like more spending cuts or more tax increases."