Since the last budget, when the deficit targets were set, the outlook for the UK economy has deteriorated and government receipts have disappointed by even more than this year's weak growth would normally suggest, so the IFS suggests that the planned era of austerity could run for eight years, from 2010-11 to 2017-2018.
The think tank says that the Chancellor will have to find another £11bn from spending cuts or tax rises on top of the £8bn already proposed if the weak outlook becomes a reality, and has warned him not to use the £35bn windfall from quantitative easing (QE) to meet his fiscal targets or risk losing credibility.
The IFS has suggested that Mr Osborne should instruct the Office for Budget Responsibility (OBR) to discount the QE cash when assessing whether the Treasury is on track to meet its targets, because the QE changes do not alter the long-term outlook for the public finances.
The OBR will make its economic forecast on December 5 alongside the Chancellor’s Autumn Statement and, according to the IFS, the Statement could bring “more fiscal pain”.
Setting out two scenarios for the economy, the Institute says that under the optimistic one, the increase in borrowing and deterioration in growth prospects will turn out to be temporary, meaning that no further action beyond what is already planned need be taken if the Chancellor is to meet his fiscal mandate of balancing the budget.
However, under the pessimistic one, the IFS says that to meet the mandate would require more of a squeeze on public spending until 2017-18 and implementing a further £11bn of tax increases or cuts to benefits in addition to the £8bn already planned.
For more information, please contact Glazers, Chartered Accountants London or visit www.glazers.co.uk
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