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Osborne challenged over big cuts

George Osborne was urged today to explain how he will achieve large cuts sketched out in the Budget - or leave voters guessing whether public services were heading for deepening post-election austerity.

Forecasts from the Office for Budget Responsibility (OBR) suggest the plans to cut back the deficit before ending austerity a year early will mean a "rollercoaster" ride for public services, with a tightening squeeze followed by a spending splurge.

Analysis suggests the cuts in 2016/17 and 2017/18 of more than 5% would be twice the size of any so far achieved by the coalition.

The Chancellor claims this does not take account of £12 billion of welfare cuts and £5 billion in anti-tax avoidance measures he is planning.

In a post-Budget briefing, Mr Osborne was urged by the head of the Institute for Fiscal Studies (IFS) to be clearer about his plans.

IFS director Paul Johnson said: "The Chancellor argues that because he is committed to £12 billion of welfare cuts and £5 billion of anti-tax avoidance measures, the required cuts to public service spending are much more modest.

"But if he really wants us to believe that, he needs to be more explicit about how he actually thinks he can cut welfare spending and raise substantial additional sums from clamping down on tax avoidance.

"My guess is that even under a majority Conservative government, annual cuts in public service spending will not turn out much more dramatic than those we have seen over this parliament.

"We won't be on the OBR's rollercoaster. But it is a terrible shame that, despite all the mass of information... I am left guessing.

"Whitehall departments are going to have to plan for some dramatically different scenarios, one of which they will have to implement in just 12 months ' time."

Mr Osborne said in his Budget speech that he was taking Britain "one more big step on the road from austerity to prosperity".

He said that because national debt was now expected to be falling a year earlier than previously expected, the squeeze on public services would end a year earlier too, and it would grow in line with the economy from 2019/20.

OBR forecasts suggest this would mean a planned surplus for that year falls from £23 billion expected at the time of last December's Autumn Statement to £7 billion.

Mr Johnson said: "The apparent change in economic philosophy in the three months since the Autumn Statement is pretty remarkable."

The Chancellor's pledge appeared designed to blunt the political impact of the OBR's analysis of his previous plans which would have seen public spending as a proportion of gross domestic product (GDP) fall to its lowest level since the 1930s.

The coalition had been stung by suggestions that the squeeze raised the spectre of a bleak future for Britain comparable to the poverty described in George Orwell's pre-war Road To Wigan Pier.

Mr Johnson said of the new plans: "Put the implied increase in public service spending in 2019/20 together with the cuts beforehand and you get what OBR chief Robert Chote describes as a 'rollercoaster' ride for public service spending.

"The cuts of more than 5% implied in each of 2016/17 and 2017/18 are twice the size of any year's cuts over this parliament."

He said the Chancellor was right to protest that this did not take account of the planned savings from welfare cuts and tax avoidance measures.

"But it is now almost two years since he announced his intention of cutting welfare spending by £12 billion," he said.

"Since then the main announcement has been the plan not to cut anything from the main pensioner benefits.

"We have been told about no more than £2 billion of the planned cuts to working-age benefits.

"And remember, apparently the 'plan' is to have those £12 billion in cuts in place by 2017/18. It is time we knew more about what they might actually involve."

Mr Johnson added: "The actual path of spending cuts over the next Parliament seems more uncertain than ever.

"That's partly because there are big differences between the parties.

"In fact our latest estimates suggest that Labour would be able to meet its fiscal targets with no cuts at all after 2015-16.

"But the Budget suggests spending cuts of £40 billion by 2018-19, but 'just' £26 billion by 2019-2020."

The IFS also examined Mr Osborne's claim that households are now better off by £900 than in 2010 while Labour leader Ed Miliband claimed people were £1,600 worse off.

Mr Johnson said there was "truth in both numbers" with Mr Miliband looking at gross earnings up to April 2014 and the Chancellor relying on forecasts of net incomes, after tax, to the end of 2015.

He said: "Real earnings have fallen, as Mr Miliband says. Real incomes should be above their 2010 level as Mr Osborne says.

"We are for sure much worse off on average than we could reasonably have expected to be back In 2007 or indeed back in 2010."

Mr Johnson said household incomes would probably be higher in 2015 than they were in 2010 and possibly higher than their 2009 peak.

"But that still represents by far the slowest recovery in incomes in modern history. Having household incomes crawl back up above pre-recession levels six or seven years after the recession hit is no cause for celebration."

Mr Johnson also looked at Mr Osborne's surprise announcement in the Budget that the scale of the national debt as a proportion of GDP would start to fall in 2015/16, a year earlier than previously expected.

This had been achieved by the sale of more assets, mainly those picked up in the wake of banking bail-outs.

Mr Johnson said: "Their sale makes no difference to the overall public sector balance sheet."

Responding to the IFS analysis, Mr Miliband said: "We now know this is a Budget which will bring public services to their knees."

Arriving in Brussels for a European Union summit, David Cameron hit out at the other parties saying they would take Britain "back to square one".

"When I first came here as Prime Minister five years ago, Britain and Greece were virtually in the same boat. We had similar-sized budget deficits," he said.

"The reason we are in a different position is we took long-term difficult decisions and we had all of the hard work and effort of the British people. I am determined we do not go backwards.

"Listening to other parties' reactions to yesterday's excellent Budget shows they want to borrow, spend and tax more. I say let us build on the success that we've had and not go back to square one."

Mr Miliband said it was clear the Chancellor's plans would deliver "cuts in the coming years twice as deep as any we have seen".

He added: "These cuts would be devastating for our National Health Service.

"This scale of cuts cannot be made without cutting our NHS.

"The truth is that this will take public spending back to the level of the 1930s.

"Public services and the damage this Government will do are on the ballot paper at this election."

Mr Johnson said that the two-year freeze on working-age benefits already announced by the Chancellor would save around £2 billion, leaving him £10 billion to find. This represented "a pretty large percentage cut" in the total budget for working-age welfare of around £90 billion, he said.

"He can't get that just through freezing benefits," said Mr Johnson. "A lot of what he's done over this Parliament has been through reducing the rate at which benefits are uprated. He can't do that over three years and get anywhere near £10 billion.

"That means he will have to implement some significant cuts in some significant benefits.

"That might be further cuts in child benefit, it might be significant cuts in working tax credits - and he can make significant cuts in working tax credits and reduce them to the sort of level they were in 2003, but that will clearly make low-income working households worse-off and put more children in poverty.

"He might want to have significant further cuts in housing benefits or he might want to significantly cut disability benefits.

"None of them feel terribly palatable. They will all clearly hit people towards the bottom of the income distribution.

"It would be nice to know what broadly or roughly he has in mind, but at the moment we don't know."

IFS research economist Soumaya Keynes said that the Budget plans implied cuts of £43.4 billion in Whitehall departments' budgets by 2018/19, before a dramatic injection of funds brings the cut back to £31 billion in 2019/20.

Overall, the cuts would equate to 7.2% of departmental spending, but if the NHS, aid and schools budgets were protected as they have been in this Parliament, unprotected areas like defence, police and local government could see their budgets fall by 15.7%, she said.

But Ms Keynes said that the plans set out by the Conservatives - including the unspecified £12 billion cuts to welfare - would allow a less steep 3.7% overall cut, and 9.4% - £18 billion - in unprotected departments.

If David Cameron heeded backbench calls to guarantee spending of 2% of GDP on defence, this would increase the scale of cuts to unprotected departments to £26.6 billion, or 16% of their total budgets.

By contrast, Ms Keynes said that Labour plans, which allow for borrowing to invest, could actually result in a £9.2 billion increase in departmental spending over the same period, with the "trade-off" of higher debt and higher interest payments.

Comparing the fiscal plans so far set out by Tories, Labour and the Lib Dems for the period to 2020, Ms Keynes said: "Under all three, debt could be falling as a share of national income over the Parliament. However, it looks likely it would be falling fastest under the Conservatives."

TUC general secretary Frances O'Grady said: "Osborne should come clean to working families that he's sharpening his axe for them. The lion's share of welfare cuts since 2010 has been to benefits that support working families, and he's ruled out so many other options that it's as clear as day they are his main target again.

"It wasn't forgetfulness that caused the Chancellor to leave the NHS out of his Budget speech, he was burying bad news. The crisis-hit NHS is set for double trouble if he's re-elected - firstly from his austerity squeeze on NHS budgets, and secondly because cuts to social care will turn hospital wards into substitute care homes."

Mr Osborne said: "This is a very significant moment for our economic debate: on the day after the Budget, the independent IFS have confirmed the OBR forecast that living standards are set to be higher in 2015 than in 2010.

"This is more evidence that our plan is delivering for Britain's families, and it demolishes Ed Miliband's central claim in this election. I'm the first to say that the job of repairing our economy isn't done, because the British people are still paying a huge price for Labour's great recession, but Britain is on the right track and we must not turn back."

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