£2,400: the bill every family will pay to cut the deficit

Huge scale of financial sacrifice needed to balance nation's books laid bare by think-tank

The true extent of the financial pain that will be felt by households and public services over the next few years was laid bare yesterday by the Institute for Fiscal Studies.

Even those on half typical earnings will see their living standards suffer as a result of the Chancellor's policies, the widely respected think-tank warns.

To protect the "ringfenced" areas of hospitals, schools and the police, there will have to be savage cuts to defence, housing, transport and higher education budgets. Cuts of almost 7 per cent a year, 20 per cent over three years, mark the severest squeeze since the Second World War, tougher than anything in the austerity years of the 1970s or early 1980s.

Even in the NHS – where total hospital spending is protected – there will be real cuts in some hospital and GP budgets, a pay freeze for doctors and a slash-and-burn approach to management, the Health Secretary Andy Burnham admitted.

The IFS analysis of the Chancellor's pre-Budget report also shows:

* a £76bn "black hole" in the public finances;

* that fixing it will cost every family £2,400 a year;

* only those on less than £14,000 will be better off as a result of the changes;

* there will be savage cuts to those budgets that have not been ringfenced of 20 per cent by 2013;

* the wealthiest 10 per cent of society will see their spending power slashed by 10 per cent;

* the increase in spending on public services seen since Labour came to power in 1997 will be reversed;

* the national debt may "stabilise" at £1 trillion

Yet, austere as Alistair Darling's announcements were, they still left many concerns that they were not ambitious enough. British government debt, gilts, fell sharply yesterday as the markets digested the pre-Budget report. Robert Chote, director of the IFS, commented that Mr Darling had "chosen to slacken the planned pace of fiscal tightening somewhat over the next few years, rather than to get the job done more quickly".

The IFS says that the Chancellor has so far only accounted for how he will recover £47bn of the structural shortfall between government revenues and spending – a further £30bn has been left unspecified, presumably for fear of political embarrassment. But even schools, hospitals and police – the "ringfenced" areas – will only see tiny increases in resources.

Most galling of all for the party that campaigned in 1997 with a promise that it was going to reverse years of Tory neglect of public services and save the NHS, the IFS says that the whole of the increase in spending on public services seen since New Labour came to power, and one of its proudest boasts, will have to be reversed if the public finances are to be returned to balance – on the Treasury's own figures. Areas such as defence, universities, housing and transport will face swingeing cuts because of a government pledge to ringfence or increase substantial swaths of spending on "frontline" services and others.

The police, hospitals, schools, overseas aid and certain infrastructure projects such as Cross Rail will benefit. But that simply makes the pain elsewhere – in political "softer targets" such as defence – even more acute. After three years some departments will see their real-terms budgets reduced by a fifth, with job and pay cuts inevitable.

That, in turn, could provoke a wave of industrial unrest not seen in decades, whoever wins the next general election. If projected efficiency savings do not materialise – and thus far the record has been patchy – the cuts will be even harsher. The Conservatives' plans, says the IFS, have fewer ringfenced areas, but the shadow Chancellor, George Osborne, is still said to have a gap in his plans of between £10.4bn and £21.4bn.

The IFS also challenges the Government's claim that only those on middle or higher incomes will be worse off as a result of their policies. On average every family in the country will see £2,400 worth of tax rises or public spending cuts to make good the shortfall – at least £500 in more tax and £1,000 in poorer services.

The Treasury states that the rises in national insurance will only affect those on more than £20,000 a year. The IFS argues that the increase in employers' national insurance payments will also affect the pay of workers, as firms seek to save on their payroll, depressing the earnings of those on as little as £14,000 a year – about half typical earnings. However the IFS agrees that the wealthiest 10 per cent of society faces by far the most pain: the new higher rate of tax on those earning more than £150,000 a year, tightening-up pensions perks and higher national insurance will reduce their incomes by 5 per cent. Additional research by the accountants PricewaterhouseCoopers suggested that, with higher mortgage bills next year, the rich face a dramatic cut in their spending power of 10 per cent.

In a final blow to the Governments attempts to regain fiscal respectability, the IFS describes the new Fiscal Responsibility Act as "not sensible" and puts the chances of the Treasury breaking its own new rules on its latest plans at 40 per cent.

Given the UK's ageing population the IFS says it doubts that the national debt could ever return to pre-crisis levels of below 40 per cent; it says a "stabilisation" at 60 per cent of GDP – a permanent national debt of around £1 trillion – seems more likely.

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