'Colossal scale' of cuts warning
The plans set out by George Osborne in yesterday's Autumn Statement will mean Government spending cuts "on a colossal scale" after the General Election, the independent Institute for Fiscal Studies has said.
Despite ministers' indications that the bulk of the UK's fiscal consolidation following the financial crisis of 2008 has been completed, the economic thinktank said that just £35 billion of the cuts in spending by Whitehall departments have already happened, with £55 billion yet to come.
If reductions in departmental spending were to continue at the same pace after the May 2015 election as they have over the past four years, welfare cuts or tax rises worth about £21 billion a year would be needed by 2019/20 - at a time when Conservatives are committed to income tax cuts worth £7 billion - said IFS director Paul Johnson.
In a post-statement briefing in London, Mr Johnson said that the precise nature of planned cuts to services like local government, defence and transport had not yet been spelt out, and stressed that it would be wrong to describe them as "unachievable".
But he said voters would be justified in asking whether the Chancellor was planning "a fundamental reimagining of the role of the state".
And he added: "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 recognition."
The plans set out in the Autumn Statement imply "a slight increase in the speed of proposed spending cuts after 2015/16", extending the expected period of reductions in state spending for a further year beyond 2017/18, said Mr Johnson.
To achieve the Office for Budget Responsibility's forecast of a budget surplus of £23 billion by 2019/20 would require "spending cuts on a colossal scale ... taking total government spending to its lowest level as a proportion of national income since before the last war", he said.
On the measure of total government spending minus spending on debt interest, public expenditure is down by £11 billion over the four years to 2014/15, but is set to fall by a further £38 billion in the five years to 2019/20.
"There is no spending dividend on the horizon, far from it," said Mr Johnson. "There are huge cuts to come. On these plans,whatever way you look at it, we are considerably less than halfway through the cuts."
If healthcare and state pensions are protected from cuts after the election in the same way they have been by the coalition Government so far, then they can be expected to swallow up a third of all state spending by 2019/20 - up from a quarter before the crisis - before any additional spending on the NHS is factored in, said Mr Johnson.
Mr Osborne's failure to meet his initial target of eliminating the deficit by the end of the Parliament was "emphatically not" a result of the Government holding back on spending cuts, said the IFS
The "disappointing" outcome on the deficit - which fell just £6 billion to more than £90 billion this year - was "because the economy performed so poorly in the first half of the Parliament, hitting revenues very hard", said Mr Johnson.
The OBR has produced a "really substantial downgrade" of £8 billion to expected tax revenues this year, and this shortfall rises to £21 billion by 2017/18, making it even more difficult for Mr Osborne to pay down the national debt.
"This lack of buoyancy in tax revenues, associated with poor earnings growth, looks like being a continued cause for concern," said Mr Johnson.
The fall in tax receipts was offset by an expected reduction in the burden of debt interest, expected to be £16 billion lower in 2017/18 than was predicted in March this year, because of the rock-bottom rates currently being charged on the international market.
Mr Johnson described the Autumn Statement's headline reform to stamp duty on residential property as "welcome but really rather modest".
Despite the reforms making house purchases cheaper for 98% of home-buyers who pay the levy, revenues from residential stamp duty are still forecast to increase from £7 billion in 2013/14 to £16 billion in 2019/20, he noted.
While removing the "absurd" slab structure of the levy, Mr Osborne's reforms left the "highly inefficient" system largely intact and failed to address similar absurdities relating to non-residential property, said Mr Johnson, adding: "This is certainly not the substantial overhaul of the taxation of housing we need."
Earlier, Mr Osborne defended the measures announced yesterday, insisting voters faced a choice between the "course to prosperity" set out in the statement or a return to the "chaos" seen under Labour after the financial crash.
He also insisted it was right to offer the £800 million stamp duty break to home-buyers rather than "pocketing" revenue raised through other reforms.
"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 told BBC Radio 4's Today programme.
"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."
But shadow chancellor Ed Balls said the £90 billion of borrowing now expected this year showed Mr Osborne's plans were not working, and promised that Labour would make "fairer" choices to increase wages and take the burden off the less wealthy.
The OBR suggested that government consumption of goods and services would fall to its lowest level as a proportion of GDP since 1938, with 80% of the reduction in the deficit still having to be found by cutting day-to-day spending.
From 2009/10 to 2019/20, spending on public services, administration and grants by central government is projected to drop from 21.2% to 12.6% of GDP, and from £5,650 to £3,880 per head at current prices.
Around 40% of these cuts are expected to have been delivered during the current parliament, with about 60% to come during the next.
Mr Balls said a key to repairing the finances was supporting wage growth among the lower-paid, which would increase tax revenues.
"Unless we have action to deal with that problem of living standards and wages to make people better off, we are going to have tougher times in the public finances and on public services too," the shadow chancellor told ITV1's Good Morning Britain.
IFS analyst Gemma Tetlow rebuked the Chancellor for announcing permanent tax breaks funded by temporary sources of revenue.
She said: " We saw some repeat of rather bad behaviour that the Chancellor has been engaging in over the last few years, which is that some of the permanent giveaways were funded by temporary takeaways."
The increased personal allowance, the stamp duty changes and the reduction in employer National Insurance contributions will be paid for by the cap on banks offsetting their losses.
"This really just brings revenue forwards, so it does look like it pays for it over the next five years, but that comes at the cost of lower revenues later on, so it is not a permanent tax increase," she said.
"Yesterday's statement announced that certain public sector employers, notably the armed forces and the judiciary, are going to be required to make £400 million of extra employer pension contributions. They are not being given any extra money in their budgets to pay for that, which obviously increases the pressure on things that they otherwise might have spent that money on."
TUC general secretary Frances O'Grady said: "Buried beneath the Chancellor's headline giveaways was a dire report on the state of the economy and the public finances.
"The IFS report lays bare the truth - the deficit is still here because the Government failed on growth and wages.
"The Chancellor now wants us all to pay the price for his failure by cutting public services down to a stump with the loss of a million jobs."