George Osborne will need to reduce borrowing by £32 billion to meet his own budget surplus rule by 2019-20, a leading economic think-tank has calculated.
The Resolution Foundation said giveaways including a cut to taxes for higher earners, corporations, and capital gains were “misguided” when official growth forecasts were being cut.
It also warned that sharp cuts would likely be required in 2020 – a pre-election year.
“By increasing spending through expensive and poorly targeted tax cuts, the chancellor has created a Herculean task of reducing borrowing by £32bn in a pre-election year,” the organisation’s chief economist Matthew Whittaker said.
“It is hard to see a government seeking to build a pre-election feel-good factor delivering a consolidation comparable to that seen during the chancellor’s first two years in office
“We think it is misguided to be giving away money on increases in higher thresholds for the personal allowance and 40p rate, which we estimate will cost around £2bn.”
The Foundation’s warning chimes with one made earlier this morning by the Institute for Fiscal Studies.
The IFS’s director Paul Johnson said this morning that Mr Osborne would “be forced to put some proper tax increases in or possibly find some yet further proper spending cuts” if economic conditions deteriorated further.
Torsten Bell, the Foundation’s director, wrote in an article on its website that on current timescales the Chancellor would have to make very sharp cuts in a pre-election year.
“The Chancellor has done the right thing by not over-reacting in the short term to swings in the OBR’s fiscal forecasts,” he wrote.
“His priority yesterday was to show that he still had a plan to deliver a £10bn surplus in the last year of this parliament.
“We think that plan requires what you might politely call an ambitious cut to borrowing in a pre-election year – although time will tell.”
George Osborne 2016 budget at a glance
George Osborne 2016 budget at a glance
1/8 Debt forecasts up, growth forecasts down
The OBR’s new forecasts have downgraded growth in all of the next five years to 2020. The watchdog says the economy will only grow by 2 per cent in 2016, as opposed to the anticipated 2.4 per cent. Borrowing and productivity growth are also down – with forecast borrowing in 2018-198 £16 billion higher
2/8 New tax on sugary drinks
The Chancellor announced a new tax on sugary soft drinks, which is projected to raise £520 million. At least some of the money will be spent on doubling funding for school sport, the Chancellor says. Labour leader Jeremy Corbyn welcomed the levy
3/8 Tax cut for higher earners paying the 40p rate
The Chancellor has raised the threshold for paying the higher rate of income tax to £45,000. The higher rate is paid by roughly the richest 15 per cent, currently people earning over £42,386
4/8 Increase in tax-free income tax threshold
The tax-free allowance increase to £11,500 in April 2017 – up from £10,600 now. The Chancellor previously raised the allowance from £6,475 in coalition with the Liberal Democrats. The Conservative manifesto pledges to put the allowance up to £12,500 by the end of the Parliament
5/8 New devolution for counties and powers for London and Manchester
The West of England, the East of England and Greater Lincolnshire will all get elected mayor-led combined authorities with new powers. The Chancellor says they are backed by £1 billion new funding. Greater Manchester will get new powers of criminal justice while London will keep its business rates – giving whoever is elected Mayor a lot more spending power
6/8 Fuel duty frozen for sixth year running
The Chancellor had planned to end the fuel duty freeze he had put in place for the whole previous parliament. In the event, he has announced a freeze for another year
7/8 All schools to become academies
As reported yesterday the Chancellor unveiled legislation to turn all schools into academies. He said all schools would either be academies or on their way to being academies by 2020, and that funding had been set aside to fund the change
8/8 Lifetime ISA
The Chancellor announced a new savings account to encourage under-40s to save for retirement – for every £4 saved, the Government will top this up by £1 up to the value of £4,000 a year. Tax-free ISAs will also be increased from £15,000 to £20,000
If cuts do fall in 2020, they will also likely coincide with cuts to tax credits, which have been rolled into Universal Credit – which itself is due in 2020.
The Government is technically bound by the Fixed-Term Parliament Act, which mandates elections every five years and was passed by the Coalition.
The Act could however in theory be repealed by Parliament – though it would have to receive the agreement of the House of Lords, where the Government does not technically have a majority.
If the Act were repealed an early election could be called – meaning the planned cuts would fall in the middle of a parliament.
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- Budget 2016