£2,840 – cost to every family of filling public finance black hole

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Indy Politics

Every family in Britain will have to pay an extra £2,840 a year in higher taxes and cuts in public services by 2017 to fix the public finances, the Institute for Fiscal Studies said yesterday.

In research released to take account of the leak of Treasury spending plans, the IFS said that public spending on areas such as the NHS, schools and defence would have to be cut by a total of 8.6 per cent per year in real terms by the end of the next parliament. This is a deeper cut than was previously assumed because the leaks show that the Treasury is now factoring in higher budgets for unavoidably higher spending on rapidly rising unemployment (up to almost 2.5 million in data released yesterday) and interest payments on spiralling public debt.

The IFS said that figures released with the Budget in March suggested that departmental budgets would be cut by 6.4 per cent a year against 8.6 per cent now – "so the leaked numbers are somewhat grimmer than we had thought."

The IFS says that if the next administration finds such cuts unpalatable, then an increase in taxes is unavoidable. "If the Government were not able or did not want to impose this 8.6 per cent real terms cut in spending on departments and instead wanted to freeze real terms spending, we estimate that they would instead need to announce new tax-raising measures worth 2.1 per cent of GDP, or £930 per family by 2013-14, to bring about their desired reduction in public-sector borrowing."

But taxes are already scheduled to rise. The IFS says that the broad plan to address the structural Budget deficit – that is the shortfall in public finances that cannot be simply attributed to the recession or special measures to stimulate the economy such as the cut in VAT – remains unaltered by yesterday's leaks. They estimate that the mix of tax rises and public spending cuts required to bring the public finances back under control already amounts to about £45bn per year in today's terms – equivalent to 6.4 per cent of national income, or £2,840 per family.

Existing government plans show that half this tightening (3.2 per cent of GDP) will be implemented by 2013-14 – with 20 per cent from tax increases, already announced, and 80 per cent coming from cuts to spending. The remaining half (3.2 per cent of GDP, or £1,430 per family) is being implemented between 2014-15 and 2017-18. The balance of new tax measures and further spending cuts has not yet been announced.

The IFS says that if an incoming chancellor wanted to bring that process of tightening forward and complete it in a parliament "cuts to departmental spending plans could only be avoided if a combination of tax increases and cuts to welfare spending were implemented with a value equivalent to £2,325 per family in today's terms."

*The Office for National Statistics reported that the number of lone parents claiming jobseeker's allowance soared by 348 per cent in the last year, as the impact of unemployment seems to have hit them especially hard. Some 34,835 are now claiming the benefit, up from 7,770 in July 2008. Those with children at secondary school seem to have found holding on to work most difficult – with the claimant count rising by 1,165 per cent, from 1,855 to 23,465. Ministers have put much emphasis on helping single parents into work.