FURTHER welfare cuts and tax rises ‘must be on the cards’ to make the government’s numbers in the Autumn Statement add up, the Institute for Fiscal Studies (IFS) warned yesterday.
In a briefing on Wednesday’s statement, IFS director Paul Johnson began by noting ‘the economic and fiscal news was bad. Again.
‘The OBR (Office for Budget Responsibility) is forecasting that the economy will be 3.6% smaller in 2016-17 than it had thought back in March. Mr Osborne has had, effectively, to abandon one of his fiscal rules – that debt should be falling in 2015-16…
‘One of the odd features of the forecast now is that a significant output gap is still forecast for 2017-18, but the OBR has not said how it thinks that gap will be filled, nor precisely what impact closing it would have on the public finances.
‘Even so, the period of austerity has had to be extended for another year to 2017-18.’
Johnson said that ‘welfare cuts over the next couple of years largely pay for two tax cuts, the cancellation of the fuel duty increase and the further increase in the income tax personal allowance.’
He went on to calculate that Wednesday’s cuts ‘will reduce benefit and tax credit spending by some £3.5 billion in 2015-16. Protection for the NHS, schools and overseas aid was confirmed for another year.
‘Other spending faces a torrid time.
‘It looks like 2015-16 will see a further 3% real cut in other (Whitehall departments’) budgets on average.
‘Roll forward to 2017-18, and if the NHS and schools continue to be protected, and no more welfare cuts or tax rises are found, then these unprotected spending areas – police, local government, defence, environment, transport – face cumulative real-terms cuts of 16% in the three years to 2017-18, or cuts of nearly a third since 2010.
‘That begins to look close to inconceivable. Further welfare cuts and tax rises must be on the cards.
‘£27 billion worth would be required to protect other spending in real terms.’
Johnson went on to note that Osborne ‘has promised a spending review for next year which should give us details of spending in the first year of the next parliament: 2015-16.
‘For that first year we have benefit and Tax Credit cuts of about £3.5 billion already announced. That number rises to £4.5 billion by 2016-17, the year for which £10 billion of cuts were mooted in the Budget.’
He calculated: ‘On top of what has happened in this spending review period that would take cuts in unprotected departments to an average of over 30%.
‘That looks close to inconceivable. There are big choices on health and welfare, crucially surely including benefits for pensioners, still to be made.’
He said: ‘The most eye-catching change was to limit increases for most working-age benefits to just 1% a year for three years starting next April. These changes will clearly create real losses for poor households with the least ability to cope with real falls in their incomes.’
He concluded that ‘the effects of yesterday’s announcements will be to reduce incomes in the bottom half of the distribution, slightly increase them in the upper middle – among workers on modest salaries and among pensioners – and to reduce incomes for the best off…
‘Some of course are riding out the hard times quite comfortably. But when you take account of what has happened to earnings, all parts of the working-age population have been losing out. In that limited and rather unhappy sense most of us really are in this together.’