The independent Institute for Fiscal Studies warned yesterday that the Chancellor's plans for slower Government spending "might prove incompatible with improving public services and reducing child poverty".
Gemma Tetlow, a research economist at the IFS said that "for all Alistair Darling's talk of billions in extra investment, his figures show that not even health – the big winner during Labour's years of plenty for public spending – will escape the squeeze".
The verdict will be a disappointment for the Government, which had made eliminiating child poverty and restoring the NHS two key priorities.
Robert Chote, the director of the IFS, also cast doubt on the viability of the Treasury's plans more broadly: "Recent financial market problems and a weaker outlook for wages have knocked a £6.5bn hole in the Chancellor's budget. Only seven months after Gordon Brown supposedly fixed overall spending plans for the next three years, Mr Darling also announced an extra £2bn of capital spending in 2010/11. Rather than fund this through tax increases or spending cuts elsewhere Mr Darling plans simply to borrow more, further increasing the chances that he will breach the debt ceiling of 40 per cent of national income that Gordon Brown had promised."
The institute also warned there was less room for manoeuvre for the Chancellor on meeting his rules on sustainable investment after he announced that borrowing would increase. Mr Chote added: "He has simply chosen to borrow more, further narrowing the already small amount of headroom beneath the Treasury ceiling for public debt. For a party which loves to lecture its opponents on the wickedness of unfunded tax cuts, this looks suspiciously like an unfunded spending increase."
The IFS identify the winners from the Chancellor's changes as lone parents benefiting from higher child tax credits and new back-to-work payments, and well-off couples gaining from changes to inheritance tax.
Losers will include wealthy foreigners forced to pay a £30,000 levy for "non-domiciled" tax status and business owners who have owned firms for two years or more who will also be forced to pay more in capital gains tax.